Monday, August 6, 2012

Too Greedy to Quit, Too Chicken to Steal: "Bypass Wall Street"

 The cry of the socially conscious investor.

You have to be careful with the "Invest locally" mantra.
Put yourself in the shoes of the pharmacist who owned his building a couple rental properties and his home.
In Detroit.

That said, current rates on bills and bonds don't attract, equities are at the level they currently enjoy solely because of the Federal Reserve and despite what the friendly RIA  (or in the case of CalPERS, the Goldman salesman) tells you, long only commodity indices are not an asset class.
What to do?

From the NYT Aug 3, 2012:
A Financial Plan for the Truly Fed Up
The deck is stacked. The game is rigged. The system is unmanageable.
With each passing scandal, it gets a little bit harder to ignore this refrain from individuals who have had it with traditional financial services companies. Perhaps it’s because the unfortunate events seem to be happening with increasing frequency.
This week, the funky trading programs at Knight Capital sent many stock prices scattering. While most individual investors were not hurt, the company, a major player in stock trading, is reeling.
The breakdown at Knight comes on the heels of — well, take your pick. The trading debacle at JPMorgan? The Libor-fixing scandal? The Facebook initial public offering? The customer restitution that Capital One is paying for what the Consumer Financial Protection Bureau said was deceptive credit card marketing?
It’s enough to give credence to the people who want nothing to do with the profit-making players of the American financial system.
I’ve heard from some of them of late, and they are not fringe characters living in fantasy land. They know they need to continue to save 15 percent or more of their income and invest it in something that earns a reasonable rate of return if they’re going to have any hope of retiring. But they don’t want to own stocks or do business with traditional financial players to achieve their goals.
Are they crazy even to try? This week, I took up the challenge of creating a financial plan for people like this — including the beginnings of a model investment portfolio — to see if such a goal was even remotely possible.
STORING YOUR MONEY It all starts with your day-to-day cash flow, so for a checking account, the opt-outters will want to do business with a credit union.
As for investments (and we’ll get to the specifics in a moment), store them in a brokerage firm at Vanguard, USAA or TIAA-CREF, all of which are member-owned or use profits to pay dividends to customers and lower their fees.
If your employer matches any money that you save for retirement, don’t turn that down out of spite for the for-profit firm that may be administering the 401(k). Keep that savings in cash if you must, but save enough to get that match.
BONDS Just because you’re trying to avoid investing with, or in, for-profit entities doesn’t mean you ought to sit out the bond market.
Consider municipal bonds, which help pay for roads and schools and other local or regional projects. “You’re basically investing in your community,” said Doug Wheat, a financial planner with Family Wealth Management in Holyoke, Mass. “Which is one of the main tenets of being a socially responsible investor.”
Vanguard’s Long-Term Tax-Exempt Fund has averaged a 6.23 percent annual return over its 35 years of existence. That’s no guarantee of long-term future performance in a world where interest rates may rise and cities are going bankrupt, but at least you can sell it if you need the money or wish to reallocate your portfolio for whatever reason.
Then there’s a curious mutual fund offering called the CRA Qualified Investment Fund. (You’ll want to look for the one that trades under the symbol CRATX.) CRA stands for Community Reinvestment Act, and the bonds it holds help banks (who buy their own shares of the CRA Qualified fund) fulfill the requirements that the act lays out.
The banks can meet the rules in part by investing a certain amount of money in affordable housing and community services for low- or moderate-income individuals, small businesses and distressed or underserved areas.
Banks now use this fund to help stay on the right side of the rules, and since 2007, individual investors have been able to as well. The annualized performance (including returns from before individual investors could play along) has been 5.16 percent.
REAL ESTATE Owning property and renting it to farmers, businesses or individuals can be a fine long-term strategy, though timing is everything, as we learned in the middle of the last decade.
But there is plenty about real estate that is nothing like owning stocks, starting with the time it takes to research a purchase. “It’s like being a vegan,” said Michelle Maton, a financial planner with Aequus Wealth Management Resources in Chicago. “You have to educate yourself if you’re going to make that choice.” After all, there is no Morningstar for buildings that are up for sale.
There are a few other things that make real estate at least as risky as owning stocks, even if you may feel better about the underlying asset. It’s not particularly liquid, so you’d better be sure you won’t need to sell quickly. The time it will take you to manage the property counts for something. Then, there are the usual tenant nonpayment and vacancy risks, plus the possibility of permanent economic decline in your region.
There is one upside: If you buy in middle age, you may pay off the mortgage just as your other savings are running out 10 or 15 years after retirement. At that point, the rental income becomes sort of an annuity.
PEER-TO-PEER LENDING In early 2011, I expressed wariness about relatively new services like Lending Club and Prosper that allow individuals to invest money in loans that other people take out. Since then, however, the services have been humming along quite nicely, delivering returns of roughly 7 percent to investors who spread their money in small bits among hundreds of loans to the most creditworthy borrowers. 
Alas, regulatory hurdles prevent the companies from taking your money in some states, including Texas, Pennsylvania, Ohio, New Jersey, Michigan and Massachusetts, though residents of New York, California, Illinois and Connecticut are free to try their luck. There are other eligibility requirements, too, based on income or net worth; check the company’s Web sites for more detail.
The beauty of this investment is that the two sites exist in large part to undermine big banks. At Prosper, 46 percent of recent loans were to people who were consolidating debt from elsewhere (often from credit cards), while at Lending Club, debt consolidation and paying off higher-interest credit cards account for just over 70 percent of all loans since inception.
SLOW MONEY One emerging wild card is the Slow Money movement, a cousin to the Slow Food approach to more sustainable edibles. It helps connect food producers of various sorts with nearby people who want to invest in them somehow. It’s a little like bond investing, a little like real estate investing and a little like the peer-to-peer approach.
“Let’s just take some of our money and invest it near where we live in things we understand, starting with food,” as the movement’s founder, Woody Tasch, puts it. He describes returns as being in the “lowish single digits,” ranging from roughly 3 percent to a few percentage points higher....MORE