Welcome to Online Business Tips

After a stroke of inspiration I decided to start a blog covering simple and practical online business tips. My goal is to help you grow your internet home business as quickly as possible. Intelligent acts count, guys. This is the first fact you need to become aware of, at least if you want to make money with any home venture. I know how difficult prospering online can be; after 5 years I have learned what to do online and what not to do online, in order to make a comfortable living.

Hey, I Travel the World

Honest to goodness, I know of no better way to prosper than by earning money online and traveling the world. I generate mobile income through multiple online businesses; opening streams helps me prosper intelligently. Never put your biz eggs in one basket; intelligent entrepreneurs know channels open and close with alarming regularity, so learn new skill sets as you proceed and things should go quite nicely, for you. Never, ever, be in a hurry to prosper online. I failed miserably for years by acting unintelligently. Perfect example here, as I decided to start this blog after researching keyword yields. I want big, steady traffic, and know I have the proper network in place to generate this traffic over the long haul.

My Online Business Goal

Now I intend to create helpful content for you on a daily basis to solve your home business problems. I do not know how many times I will post daily; could be 1 time, could be 10 times, depending on how inspired I feel. I do know that each post will not exceed 500 words and I will solve some specific home biz problem every time I send a blog post your way. This I can promise you, because I have been in your shoes, whether you are struggling horribly now, or you are keen to jump a few tax brackets, and burst into higher circles. Buckle up all. Let's have some fun! Ryan Biddulph helps you grow your online business and travels the world too.

The Golden Rules of Investing

Earlier this year some folks from the U.K. came to our house to make videos in which I pontificated about passive investing. Some of the material will be included in longer pieces on their site but short snippets are also available there.

Here is one on my views of the two most important rules of investing:

The Golden Rules of Investing (Video)

The Capital Asset Pricing Model in Brief

Here is a very short video made at our home by the folks at sensibleinvesting.tv. In it, I explain the essence of the Capital Asset Pricing Model. As one can imagine, I have said more (much more) elsewhere.

Here is the link:

What is the Capital Asset Pricing Model?

Magical Thinking about Pension Plans

This year I was fortunate enough to be awarded the Lillywhite Award for extraordinary lifetime contributions to Americans' economic security. Dallas Salisbury, President of the Employee Benefit Research Institute which sponsors the award, presented it to me at the Pensions and Investments Defined Contribution Conference in San Francisco, California. The following is a slightly edited version of my invited remarks thereafter.

I started studying pension funds when most people had defined benefit plans. No decisions. You worked, you got paychecks. You retired, you got smaller paychecks, You died, your partner got even smaller paychecks. He or she died, the paychecks stopped.

Now defined benefit plans survive mainly in the government sector. Social Security of course. And pension plans for government employees. But they can teach us something about defined contribution plans.

Take CalPERS. It covers non-teaching state and many local government employees in California. And, officially, it is substantially underfunded. This is based on the assumption made for funding by the CalPERS actuaries that their portfolio of bonds, stocks and exotica will return exactly 7.5% every single year. Moreover, they value assets at an average of past values.

Magical thinking. Bad economics.

Almost every economist who has looked at similar pension funds concludes that assets should be valued at market and that liabilities should be valued by determining the cost of a low-risk government bond portfolio that could provide the funds to pay the benefits already earned. For CalPERS this portfolio would be primarily in TIPS since their benefits are mostly indexed for inflation.

When the liabilities are valued with good economics, the extent to which CalPERS is underfunded is not just substantial – it is woeful.

But this is a Defined Contribution conference. Employers in the DC world have no liabilities and mark assets to market – in some cases every day. No magical thinking. Good economics.

Yes, but...

Sometimes in projecting the amount that should be contributed to a defined contribution plan there is magical thinking. We or our employees may assume the portfolio will earn 7.5% or so per year for sure. The market may go down, but if so it will feel sorry for us and go back up in short order.

But the good news is that we are getting better in helping employees get a sense of both expected return and risk in the accumulation phase.

But not always in the decumulation phase.

As the baby boomers enter retirement, every part of the financial industry is lusting after their money. Financial advisors have strategies for managing investments and spending. Insurance companies have traditional annuities and guaranteed withdrawal plans. Mutual funds have retirement income products. Employers have extensions of 401(k) plans. Everyone wants a piece of the action.

For good or bad reasons, left to their own devices, retirees invest relatively little in traditional annuities, foregoing the significant advantages of pooling mortality risk.

Moreover, thanks to Chairman Bernanke and his counterparts around the world, low-risk investments currently offer paltry nominal returns and negative real returns for all but the very longest horizons.

What's an investor to do? A frequent answer is this. Invest in risky securities, which should provide higher returns. Spend on the assumption that returns will be 7.5% (or so) per year. Not to worry, returns may vary, but they will average out in the long run. Once again, magical thinking and bad economics.

So what should financial professionals, do? One answer is to use Monte Carlo analysis with a sensible market model to generate possible scenarios for future investment returns, then use the results to help investors understand the true implications of alternative decumulation investment and spending strategies.

Admittedly, neither the creation or the communication of such ranges of outcomes is easy. But investors need to understand that if they take market risk, someone will be exposed to that risk. If something bad happens, it is going to happen to someone. It might be them or it might be their beneficiaries. Their financial advisor, investment company or employer may get smaller fees, but won't bear the majority of the impact. And if insurance companies take market risk, they do so at their peril or, worse yet that of the taxpayers who might have to bail them out.

Pooling can't help – when the market crashes it takes almost all the players with it.

If your investments are subject to market risk, so are the prospects for your spending and/or that of your beneficiaries. Even the cleverest financial strategy can't magically make market risk disappear.

So, I implore all those who help people save and invest for retirement and then use their savings sensibly in retirement. Please avoid magical thinking and bad economics. Employees and retirees deserve better.

Pension Obligation Bonds

A short video raising some important questions about pension obligation bonds.

Satirical Video

This is my attempt at humor regarding post-retirement finance.

Derivatives

Several words that start with D have become terms of opprobrium recently. Many have argued that debt and derivatives bear much of the responsibility for the current recessions in many countries. Some fear that depressions could follow.

Depressions may or may not be in store. But times are bad enough now and excessive debt and reckless use of some derivatives clearly deserve much of the blame.

Most of us have direct experience with debt. You give me money now and I promise to repay you later with interest. Of course it is not always this simple. The bewildering complexity of some debt instruments can boggle the mind. But at least the fundamental idea of debt is familiar.

In contrast, you may think that you have never bought or sold derivatives and have little or no notion about their good and bad features. What are they? Are they really needed? If they are malevolent why not just outlaw them?

Here is a starter course. I will have more to say in future posts.

Wikipedia defines financial derivatives as follows:

Derivatives are financial contracts, or financial instruments, whose values are derived from the value of something else (known as the underlying).

I was brought up to take umbrage when an adjective ("underlying the ...") morphs into a noun ("the underlying"), but this usage is too pervasive to ignore.

The Wikipedia definition is a good start, but let’s make it a bit more general:

 A financial derivative is a contract in which one party promises to make a payment to another party in the future, where the amount to be paid is based on the value of something else (known as the underlying) at the time.

Even this is not broad enough but will do for now.

Here is a graph of an example that appeals to many investing for their retirement years.

 

Your neighborhood bank manager, who looks a bit like the actor Jimmy Stewart, comes to you with the proposition summarized in this graph. The x (horizontal) axis shows the value at the end of the year 2010 of $100 invested today in Standard & Poor’s 500-stock index.  The y (vertical) axis shows the amount that you will receive at that time from the bank. When the time comes, the value of the hypothetical investment in the S&P500 will be computed and marked on the x-axis. Then the point on the curve directly above it will be found and the height (y-value) determined. This is what you will be paid.

 Pretty attractive, isn’t it? If the market goes up, you will get more. If it goes down, you will get $100. In finance-speak you get upside potential and downside protection. All you have to do is add your signature to the contract already signed by the bank.

 But wait. What do you have to pay for this contract?  More than $100 of course. Perhaps $110. So you could lose money, but no more than $10 out of your initial investment of $110.

 This sounds good to you, so you pay the money and sign the contract. You have just purchased a derivative. The payoff (shown on the y-axis) depends on the value of an underlying (shown on the x-axis) in the manner shown by the red curve.

 Not so fast. Recall that the red curve shows you the amount that the bank has promised to pay. Somewhere in the fine print in the contract there may be an indication that under some conditions they might pay less. Perhaps it should have said “we promise to pay you no more than …” 

 The possibility of receiving less than promised gives rise to what is known in the trade as counterparty risk. In this case the bank is your counterparty. If they were to go out of business before the end of 2010 or force you to get partial payment from a bankruptcy court, your actual payoff would be below the red curve.

 Here is a more realistic picture of what this derivative might pay you. 

You could end up below the curve. In fact, you might end up with a payoff of zero – most likely in a situation in which security markets, including the U.S. stock market, had fallen like rocks.

All this can be summarized in a formula:

The symbol x represents the final value of the underlying. For emphasis I have put a tilde (squiggly line) over it to indicate that its actual value is not known with certainty before the payoff date. The symbol y represents the value of the payoff, which is also uncertain today. The symbols f(..) represent a function, which relates the promised payoff to x.  In this case, it is the red line in our first figure – it shows the relationship between the underlying (x) and the promised payoff.

 The final term. e,  is the amount by which the actual payoff y falls short of the promised payment f(x). Since it is generally uncertain before the payoff date, I have put a tilde over it as well. If you are lucky, it will equal zero. If not, the value of e will be positive and the payoff lower than promised.

 This derivative has two sources of risk. Absent clairvoyance, you don’t know for sure what x will be. Moreover, you don’t know whether e will be zero or positive and, if the latter, how big it will be. The first is underlying risk; the second is counterparty risk.

 The press has gorged on stories of derivatives gone bad and I will reflect on some of them in future posts. Sometimes when you take risk you lose. But that doesn’t mean you should avoid risk at all costs. As we will see, a sensible approach to lifetime finance involves taking some risks and avoiding others, with or without derivatives.