The Independent Investor: The Debt Ceiling Turnabout

Both houses of Congress passed the debt ceiling this week with no strings attached. That means that global investors will be assured that the United States will honor its commitments until at least March 15, 2015. Should we care?

Aside from the moral question of paying one's debt payments on time and a real catastrophe if we don't, the debt ceiling has been one 11th-hour deal after another. It has been pure political theater in this country since 2009. In the Republican-controlled House, only 18 out of the GOP's 232 majority voted for the bill. Two Democrats voted against it. Are you surprised?

If one were naive enough to believe that the Republicans actually believed that America's "out-of-control debt ceiling" was the most dangerous threat to this country, well, I have a bridge I can sell you in Brooklyn.

Both parties clearly understand that the debt ceiling is simply the money that we already owe to our debtors. It is money already spent by our government. Read my lips: by the time it has become debt it has already been spent.

The truth is that both sides of the aisle continue to spend money like drunken sailors. The only difference is in what they buy — guns or butter. Take the latest farm bill, for example. Food stamps were cut, thanks to the GOP, but farm subsidies to the nation's farmers (of whom 80 percent are giant corporations) sailed through the House to the tune of $1 trillion in spending over the next five years. What needs to be reduced is the money government is spending month after month and year after year and there's no indication that will change anytime soon no matter who is in power.

Remember that it is the Republican-controlled states (Red States) that receive the majority of government social spending. For all of their posturing about reducing "welfare spending," the Republicans are not about to bite the hand that feeds them. It's simply the mix of spending that changes between the two parties, not the amount.

Historically, the Democrats tend to spend more on social programs. The Republicans maintain social spending, while cutting taxes. Democrats and Republicans alike have always been happy to spend on defense. Bottom line: both approaches increase the deficit and the debt ceiling.

Clearly, the abrupt turnaround in the Republican's willingness to drop the debt ceiling issue has everything to do with the coming mid-term elections this year. The 16-day, Federal government shutdown last year was a national fiasco. As a result, Republican strategists quickly decided that the party needed to take a break from confrontational politics, at least until the elections are over.

They are counting on the fact that we will forget their past sins by the time November rolls around. It remains to be seen whether voters will be dumb enough to accept their new image as the party of compromise but if they do, and then the GOP has a good chance of capturing a majority in both houses this fall. If their strategy fails, they can always quickly return to partisan politics. Readers please note that the debt ceiling deal expires in March of 2015 and that is no coincidence.

 The pretense that the debt ceiling is some kind of line in the sand that America must not cross is misleading, if not downright duplicitous. At least investors will be spared the needless drama of a debt ceiling battle for the remainder of this year. Hopefully, after the election, both parties will relinquish the debt ceiling as their favorite hostage but I won't hold my breath.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: Should You Rollover That Retirement Plan?

If you still have your money invested in your former employer's retirement plan, you may want to rethink the wisdom of that decision. Time and again, retirees, or those saving toward retirement, take the easy way out and do nothing. That could be a big mistake.

Invariably I meet prospective clients who have one, two and even three 401(k) or 403(b) retirement plans from former employers that just sit at the old companies, untouched and ignored. In the vast majority of cases, these plans should be rolled over into a tax-deferred Individual Retirement Account (IRA).

"I left it at my old company because it's free and I don't have to manage it," explained one recent prospective client, who now works at a consumer magazine. Nothing could be further from the truth.

Company retirement plans charge you anywhere from 1.5-2.5 percent annually for the privilege of investing and tax-deferred saving. It is their dirty little secret. The Department of Labor now requires companies to be upfront with the fees they are charging employees. Some studies estimate that employees pay 33 percent or more of their entire retirement savings in fees over the average life of their employer plan. Those fees continue if you leave and your plan stays and may actually go higher if the ex-employee is no longer contributing to the plan.

Many investors mistakenly believe that their company actively manages their portfolio as if it were a pension plan. Not true. The responsibility for managing that money is in your hands. You may not know what to do with it, but by abdicating your responsibility, you open yourself up to potential losses or missed opportunities while continuing to pay a stiff fee.

Most employer-sponsored plans offer a limited number of investment choices. I have seen plans that have ten or twenty fund choices while others have no more than four or five. Many times the performance of these offered funds are mediocre at best.

At the very least, having retirement savings in several locations adds confusion and makes tracking your investments and returns far more complicated. The older or busier one becomes, the less complexity one needs in life — especially when it comes to your money. Trust me; it is much easier to monitor your investments in one IRA rather than in several 401(k) s.

The same advice applies to rolling over you old 401(k) or 403(b) into a new one at your present company. Do not do it. The same set of conditions exists within your existing company’s plan.  Better to roll over those funds into a lower-cost IRA.

So how hard is it to rollover your retirement savings? All you need do is open an IRA at any broker, bank or money management firm. It costs nothing and they do the paperwork. Once you have your new account number, you simply call your old plan sponsor (the number is on the statement) and inform them that you want to rollover your dormant employer-sponsored plan to your new IRA and give them the account number.

Depending on the company, they can either send you an application to facilitate your request or simply transfer the funds based on your phone call. Some companies insist on sending you the check. If so, you have sixty days to deposit it into your rollover IRA or you will pay a tax penalty. Most companies simply transfer your money directly into your new IRA. The entire process can take a few weeks to a month or so. It costs you nothing to do it.

You will immediately enjoy a cost savings, since you are no longer paying those high plan fees each year. Your menu of investment choices will be vastly larger offering you the very best funds at the lowest costs available. If you have little or no knowledge of investments, you can hire an investment adviser. The fees will most likely be lower than the fees you are paying now. If money managers are not your thing, hire a broker to do the job. Just make sure you find a good one who is willing to listen, to charge you a reasonable commission and keep your investment choices to the lowest cost funds with the smallest sales charges.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: Income Inequality on a Global Scale

Income inequality has suddenly become a hot topic. Think tanks worldwide are releasing studies on the issue. In this country, the president has made it a political issue in the mid-term elections. This week in Davos, the World Economic Forum will take up the gauntlet as well. It's about time.

Two years ago, readers may recall my four-part series on the growing inequality here at home and throughout the world. You were shocked to learn that America ranks last among all developed countries in income equality. As a nation, our income inequality is about equal to that of the Third World sandwiched between Uruguay and Cote d'Ivoire. States such as Massachusetts ranks about equal with Mexico, Connecticut with Venezuela, New York with Costa Rico and New Hampshire with Cambodia.

This week Oxfam, a non-profit confederation of 17 organizations in 90 countries, released a study that indicates that 85 of the richest people in the world own as much as the poorest 50 percent of humanity. Think of it, a double-decker busload of one percenters control $1.7 trillion, equivalent to the combined wealth of 3.5 billion people. Seventy percent of the world's population lives in a country where inequality has increased over the past 30 years.

In the United States, the gap between the have and have not's has grown at a faster pace than in any other developed country. The top 1 percent captured 95 percent of all the post-recession growth since 2009, while 90 percent of us became poorer, Oxfam's report mirrors several other studies including a University of California, Berkeley study, the Pew Research Center's findings and the IMF. The results are essentially the same.

At the tiny Swiss town of Davos, 2,500 participants from almost 100 countries will be flying in on their private jets and limousines. In years past, attendees were largely billionaire tycoons, business executives, the rich and famous, in essence a genteel gathering of the world's one percent. Supposedly, this year, they will be joined by some of the rabble. Representatives from international non-profit organizations, members of civil society and spiritual leaders, academia and the media have been invited.

This will allow for a larger cross-section of political, cultural and societal views but, excuse my cynicism; it is still essentially a rich man's club. As such, how serious will its members address income inequality when it is they who have profited the most from the trend? Granted, the fox may express its concern and sympathy over events in the hen house, but do we really think he will stop eating the hens?

In our own country, politicians on both sides of the aisle are honing their stump speeches. The Republicans will be preaching how free markets are the answer to income inequality while conveniently ignoring the failure of 30 years of "trickle down" economics. The Democrats will argue that the nation needs more social programs and even greater redistribution of income in order to level the playing field. Of course, they will dodge the fact that three decades of government-sponsored social initiatives have failed to even slow the growth rate of inequality in this nation. Could it have something to do with the fact that the average elected official in this country is a millionaire and thus part of the 1 percent?

Riddle me this reader, what happens to societies when inequality reaches a critical mass? The think tanks use words like "explosive," "serious damage" and "instability" in explaining the outcome. They are all code words for revolution, armed conflict and massive upheaval. Usually, a leader appears to lead the revolt, maybe a Robespierre or a Hitler or someone worse.

It surprises me why more people fail to see the connection between the growing income inequality and recent global uprisings in the Middle East, Asia and other places. I'm hoping this recent concern is more than a passing fad or a sop for the masses because the stakes are high, ladies and gentleman, and getting higher every day.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

Independent Investor: The Internet Will Change

"Net Neutrality" is the official name for an open Internet. It means that all Internet providers are to be treated the same regardless of whether you are a mom and pop company or a global behemoth. This week's federal appeals court ruling pulled the plug on that concept.

The judges ruled that the Federal Communication Commission's anti-discrimination rules were beyond the scope of its authority when it came to the Internet. Congress gave the FCC authority to regulate common carriers, such as telecommunication companies, years ago. The FCC has always ruled that telephone networks cannot discriminate against consumers.

However, back in the Bush administration, the FCC was pressured by phone and cable lobbyists to categorize Internet service providers differently. They are considered information services, which we now discover exempts them from common carrier rules. In hindsight, that was a big mistake.

For consumers the fallout could be huge. Fee-free services that we now take for granted may not work as well as before. Internet service providers could now charge fees for the privilege of "service in the fast lane" while the rest of us find we have been consigned to the tortoise lane.

If you're a company that really needs a large amount of bandwidth to provide your services to the consumer in a timely fashion, fees will be going up. Think of companies such as Netflix, Amazon Prime, YouTube, Facebook and others that may have to pay more to ISPs in order to ensure that their content remains accessible to their customers. We all know what that means — higher costs will be passed on to us in the form of higher charges for the same service.

Higher fees could also mean less innovation. Much of today's new ideas are Internet-related, simply because anyone with a good idea can try it out with little to no cost on the Internet. There will be fewer garage startups by Internet and Web-enabled entrepreneurs. Small companies will find it harder to launch new services or compete with existing players that have the resources to pay and keep new players out.

But this is not only about the cost of your next viewing of "House of Cards" or "Orange is the New Black." The Internet has become society's great equalizer. Anyone, regardless of background, income, or race can access the Web for any number of reasons from education to entertainment. As ISPs begin to resemble cable companies, those who can pay will receive a far different level of service from those that can’t.

Society in general will suffer as yet another great divide will be created. Those who can pay will have access and those who don't will see further stratification of society based on incomes and demographics. From the great equalizer, the Internet could become the great divider over time.

There is still hope, however. Net neutrality could still survive. There is nothing in the court's ruling that prevents the FCC from reversing their Bush-era decision. They could simply change the definition and treat the Internet providers as part of the telecommunications industry. Of course, that would put them at logger heads with a very powerful lobbying army and a number of politicians who are being paid to represent the interest of the ISPs.

That's where you come in. You could always call your elected official and express your opinion.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: Make a Financial Resolution This Year

As most of us resolve to lose weight, quit smoking or in some other way change our lives this year, don't forget to re-evaluate where you stand financially. There are some simple steps you can take that will reshape your fortunes for years to come.

Most people don't know where they stand financially. Many can't tell you how much they spend or make, what their tax bracket is or how much they have saved. My advice is to create a budget as well as a statement of net worth.

It is not that complicated. Just track your spending for a month, separating essential from non-essential expenses. Next keep track of whatever income comes in. Subtract one from the other and you now have a cash flow. Now you can figure out what you spend and what you make a year simply by multiplying by 12 months.

Now comes the important part. If you spend more than you earn, as most of us do, you will at least know how much debt you are accumulating each year. There is no way anyone can get out from under a heavy debt burden unless they know how much debt they have in the first place. A first step in reducing that debt would be to cut back on those non-essential spending items.

On the other hand, some of us may find that we earn more than we spend each month but somehow the money just disappears. Usually, it is found among those same non-essential items that you don’t need but buy anyway. This is money that you should be saving toward retirement. You should be saving 10-15 percent of your pre-tax income each year, starting in your 20s, and add 10 percent more for every decade you don't.

Personal net worth is also a good thing to know. Once again, sit down and add up everything you own and how much it is worth. Next, figure out what you owe: mortgages, car payments, medical bills, school loans, etc. Subtract one from the other and you now have your net worth.

Armed with this new budget and net worth information, you can now create some goals and objectives. Are you spending too much? If so, create a spending reduction goal each month through the end of the year. Establish a debt-reduction goal for the year and make sure you are on track each month to achieve it.

If you can save, establish a goal for how much you will put away this year, and keep to it. At first it may only be an emergency fund, which in a pinch; would cover 3-6 months of expenses. After that, you might want to think about saving toward retirement through one of the many tax-deferred savings plans available.

These are simple steps that cost nothing but time and effort. The trick is to stick with the process. So often, New Year's resolutions last about as long as it takes to write them down. This year don't let that happen to you.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.