Savers' year of pain after bank holds rates

Millions of families and pensioners have suffered a year of interest rate misery that has left the average saver nearly ￡600 worse off.

The Bank of England yesterday held interest rates at 0.5% for the 12th consecutive month. Campaign groups said it marked an unhappy anniversary for savers, who have been stung by the worst rates in history.
Their suffering was worsened by research which showed there is not a single easy-access savings account paying a rate which beats inflation. And some experts believe the decision to slash the base rate has not helped the economy as much as had been hoped.

In March last year, the Bank's governor Mervyn King halved the base rate to 0.5% to try to stop a recession turning into a depression.

But Britain was one of the last major economies to emerge from recession, and grew only by a modest 0.3% in the final quarter of last year.

Yesterday the campaign group Save Our Savers said there was widespread fury among savers, who outnumber borrowers by seven to one. Many are pensioners who rely on the income from their savings.

Spokesman Reverend Dr John Strain, a parish priest and financial adviser to the Diocese of Guildford, said they felt a sense of 'betrayal and anger' from rates which are 'pitiful.'

'The fever of frustration among savers has turned into real anger since the financial crisis,' he said.

 

Alex Brummer: 'How banks are exploiting the low base rate'
'Responsible savers did not cause the economic collapse but they are being forced to carry the can yet again. Many are struggling on a much reduced income while others are watching their savings shrink in front of them.'

 

A basic rate taxpayer needs a savings rate of at least 4.38% to make sure that their money is not eroded by inflation, currently 3.5%, according to research from financial information firm Moneyfacts.

 

But none of the 326 easy-access savings accounts pay this rate. The average is a paltry 0.72%. With ￡20,000 in an account, this would pay interest of just ￡12 a month.

Before the Bank started slashing the base rate, savers were getting more than ￡60 a month.

Darren Cook, a savings expert from Moneyfacts, said: 'It is a kick in the teeth for prudent savers. These rates are an insult to their years of hard work to prudently put money aside for the future.'

Some accounts pay 0% or 0.01%, which is worth just 17p a month. But many economists predict that interest rates will remain low for at least a year.

Invest like Warren Buffett

Warren Buffett is the world's third richest man with an estimated fortune of over $52bn.

But unlike the other billionaires that feature in Forbes' list of the 10 richest people in the world, Buffett doesn't have a retail empire, an oil well or a brain for computing to show for it – simply a lot of share certificates.

The 76-year-old made his money through identifying companies that he believed were worth more than their market value, investing in them and holding that investment for the long-term. And it's certainly paid off.

Class A shares in his company Berkshire Hathaway were $15 when he first took over in 1965 – today they are valued at $109,800 per share.

It sounds remarkably simple, but given the ups and downs of the stock market, it takes a high level of discipline, nerve and conviction in your decisions. Although Buffett has never written a book detailing his investment style, much can be gleaned from the annual letter he sends to Berkshire shareholders.

He doesn't view the purchase of shares in a company as buying a stake in that business, but believes that the investor should feel that they are actually buying that business outright. Because of that he looks for quality management, a durable competitive edge and low capital expenditure.

Companies tend to have a strong brand name – Coca Cola, McDonalds and Gillette feature in his holdings – and a good history of solid earnings growth. We run through how Buffett invests his money

HOW TO INVEST$20,$100,AND$1000(AND MORE)

HOW TO INVEST$20,$100,AND$1000(AND MORE)

Got only $20 to put away right now?

It may not sound like much, but you can use it to buy shares in Intel. Or Johnson & Johnson. Or Harley-Davidson (you rebel). And those are just a few of more than 1,000 options available. What if you've got $100 -- or $1,000? Your options are even greater.

We're not here to tell you where to invest your money. We won't lay out a handful of stocks on a "buy" list. But what we can tell you is how you can invest your money -- the mechanics of investing small, large, and medium amounts of cash. We can even help you choose a broker.

How to invest $20
Let's start with $20. We're going to assume that you've already paid off any high-interest debt and that you have some money stashed in a safe place (like a savings or money market account) that you can get to quickly in case of an emergency expense. Now you find yourself with a little extra dough, and you want to begin investing for your future.

Is it even worth it to invest such a pittance?

Heck yeah it is! One of the best ways to invest small amounts of money cheaply is through Dividend Reinvestment Plans (DRPs), also known as Drips. They and their cousins, Direct Stock Purchase Plans (DSPs), allow you to bypass brokers (and their commissions) by buying stock directly from the companies or their agents.

More than 1,000 major corporations offer these types of stock plans, many of them free, or with fees low enough to make it worthwhile to invest as little as $20 or $30 at a time. Drips are ideal for those who are starting out with small amounts to invest and want to make frequent purchases (dollar-cost averaging). Once you're in the plan, you can set up an automatic payment plan, and you don't even have to buy a full share each time you make a contribution.

Drips may be one of the surest, steadiest ways to build wealth over your lifetime (just make sure you keep good records for tax purposes). For more details on Drips, see "What if I can only invest small amounts of money every month?"

How to invest a couple of hundred bucks
So you've weeded out all the wooden nickels from your spare-change jar and have tallied up a few hundred bucks. Instead of blowing it on snack food and Elvis memorabilia, consider investing it in an index fund (the only kind of mutual fund Fools like). An index fund that tracks the S&P 500 is your ticket to an investment that has traditionally returned about 10% per year.

Some index funds require as little as $250 for you to call yourself an owner. This low minimum is usually restricted to IRAs (Individual Retirement Accounts). After your initial investment, you can add as much money as you like, as frequently as you like, with no additional costs or commissions. You purchase index funds directly from mutual fund companies, so there are no commissions to pay to a middleman.

If you have a few hundred dollars to start with, then this is a great, low-cost way to establish an instant, widely diversified (500 companies!) portfolio.

How to invest $500
Once you're up to $500, your investment options open up a bit more. You can still buy an index fund, and now you'll have your pick of fund companies that require higher initial investments. This freedom will enable you to shop around for a fund with the lowest expense ratio.

You should also seriously consider opening a discount brokerage account. You'll want to focus on the account option that best serves your needs; some accounts require a minimum initial deposit, and some don't. That means you can open up an account with whatever investing money you have available, and start researching and perhaps purchasing individual companies. (Or, if you're enamored of index investing, you can easily invest in Spiders, a stock-like investment that mimics the performance of the S&P 500.)

The key here is to keep your costs of investing (including brokerage fees) to less than 2% of the transaction value. So if you're planning to add to your position in stocks a few times a month, a Drip or an index fund may still be the way to go.

How to invest $1,000-plus
What can you do with a grand? Obviously, with $1,000 you can open up a discount brokerage account, but look at the rewards if you can scrape up an additional $1,000 a year to add to your original investment.

Say you've got 40 years to retirement. If you start with $1,000 and invest an additional $1,000 each year, and your money earns 10% annually, then when you're ready to retire at age 65, you'll have $532,111.07. That seems worth it to us. If you have earned income, you can set up a Roth IRA, and you won't even pay any taxes on that $532K when you withdraw it. (As always, your mileage may vary.)

Again, even at this level, the key is to keep fees from eating up your earnings. So make sure that the costs of investing (including brokerage commissions, stamps to mail in checks, and books that help you learn to invest) are less than 2% of your account's overall worth. With small accounts, that can be a challenge, but with such low commissions being offered by discount brokers, it's definitely doable.

 

how to invest when you're broke

How do you start investing if you're barely scraping by?

Say you're making $25,000 a year and know that (along with feeding yourself, paying for gas, rent, etc.) you need to start thinking about your future.

It pays to do that, because even small amounts add up surprisingly fast if you invest on a regular basis. And Uncle Sam will even kick in free money on top of that.

For instance, over the past 10 years, the stock market, at least as measured by the S&P 500 Index ($INX), has returned around 8%, on average, annually. Say you start with nothing and invest only $10 per week. If you pick an investment that only matches the S&P's 8% return, after 10 years, you'd have around $8,000. You have $10,000 if you got lucky and picked an investment that churned out 12% average annual returns.

Even better, if you're a poor person, the government rewards you by refunding as much as half of what you put in. Singles earning up to $15,000, head of households earning up to $22,500 and married joint filers earning up to $30,000 get a credit of 50% of funds contributed to an IRA or 401(k). That means, for instance, if you invested $1,000 in your 401(k) last year and qualified for the credit, your refund would be $500 larger. (A dedicated saver could turn right back around and plow that $500 into a Roth IRA as well.)

One big caveat: Investing in small amounts isn't about investing in individual stocks. All stock investors, no matter how talented, eventually pick a clunker, a stock that drops 25% or 30% before your first cup of coffee in the morning. That's not so bad if you own 20 stocks. But it would be a disaster if you hold only four or five.

Instead, mutual funds and exchange-traded funds make more sense for small investors. Richard Jenkins, editor-in-chief of MSN Money, explains here how to use ETFs. Below, I'll explain how to get started using mutual funds.

Why funds?
For starters, mutual funds give you automatic diversification. Most hold dozens, if not hundreds, of stocks. So, when one goes south, its impact on the portfolio is minimal.

Also, fund managers have advantages over individual investors. It's their day job, and because their trading generates huge commissions, they have access to better information than individual investors.

How, When And Where To Invest

Many people are scared of investing. They prefer the safety of leaving their cash in a bank or building society. While it's true you won't see the value of your savings lurch up and down on a daily basis, we're going to show why failing to invest can cost you money in the long term. And we're not talking about a few pence, we're talking about thousands and thousands of pounds!

The five main types of asset

First of all, let's look at the five main types of asset you can park your dosh in:

Cash (e.g. a savings account with a bank or building society); Bonds (e.g. a loan to the government or a large company); Property (e.g. residential or commercial property); Equities (e.g. shares in companies such as BP or Vodafone); and Commodities (e.g. copper, oil or coffee) A general rule of thumb is that the riskier an asset is, the greater return you'd expect to earn from it over the long term. We're going to talking a lot about the "long term" in this guide - generally it means five years or more.

Cash is generally considered to be the safest asset, but it also likely to give you the lowest return over a period of several years or more. Bonds are slightly more risky than cash but normally generate roughly the same level of long-term returns. Property tends to do well over long periods and the returns are quite stable. The returns from equities and commodities vary the most from year to year, but tend to be highest of all over long periods.

As an example of the difference in volatility, here in the UK, the real annual return of cash over the last 100 years (i.e. the annual return after taking off inflation) has been primarily between minus 5% and plus 8%. For equities, the majority of annual returns for the last 100 years fall between minus 15% and plus 25% and the chances of losing money in any individual year has been approximately one in four.

Long-term returns

To illustrate what effect this can have, let's look at some numbers. Here is the average annual return for cash, equities and gilts over the last fifty years (note that gilts are the main type of bond in the UK, being a loan to government). The figures are taken from the Equity Gilt Study produced by Barclays Capital.

Asset Average return
Equities 5.7% pa
Gilts 2.4% pa
Cash 2.0% pa

Expressed in percentage terms these figures don't look that interesting. So let's look at them another way. Say you invested £1,000 in each of these three assets fifty years ago. How much money would you have now?

Asset Value after 50 years
Equities £15,752
Gilts £3,218
Cash £2,692

Now we're talking. Investing in equities would have resulted in five or six times the amount you would have got from gilts or cash! And remember that these figures are after inflation, meaning the buying power of your initial £1,000 would have increased 16-fold over the course of the last fifty years.

No one knows what will happen in the next fifty years of course. However, these figures span numerous wars, recessions, shocks and other crises. We think they provide a reasonable as to what sort of returns to expect in the future as well.

As we've seen in the last decade though, the returns from shares can be weak for a considerable period of time. A key point to recognise here is that if you want to earn a high rate of return, i.e. higher than you'd typically get from a savings account, you need to accept some risk. That means getting comfortable with the fact that your investments will go down in value some of the time.

When To Invest

That's all very well, you might say, but I don't have fifty years to invest. However, you might if you've just started work and you're looking to invest for your retirement. But investing in shares also works well over shorter periods, too.

Turning to figures from Barclays Capital again, we can see that shares have beaten cash the majority of the time over shorter periods as well.

Period Shares have beaten cash
2 years 67% of the time
5 years 75% of the time
10 years 93% of the time
20 years 99% of the time

Even over a period as short as two years, the chances of shares beating cash are two in three. However, most people, ourselves included, advise that you shouldn't invest in shares for any period shorter than five years. The rationale is that the chances of losing money less than five years, while fairly small, are still quite significant.

For example, there have been two occasions in the past 100 years where shares have fallen three years in succession. So you're usually better off sticking to cash if you have definite plans for your money in the next five years (to put down a deposit on a house for example).

So when should you invest? The earlier the better. It's advisable to keep a portion of your money in cash, in case of emergencies. Three to six months' salary is a good guide as this is often the period you'll need cover before any insurance policies you may have start to pay out.

Once you have an emergency fund in place, the longer you give yourself to invest, the greater your returns are likely to be. So invest as soon as you can. There is a risk that you will invest just before stock market takes a tumble. There is very little you can do about this. No one knows where share prices will go in over the next minute, day or month. All we do know is that the long-term direction of the stock market is up - but it's not a straight line!

In practice, you're unlikely to invest all your money at one particular point in time. It's far more likely that you'll invest small amounts of money on a regular basis. So while you might see immediate stock market falls some of the time, most of the time this won't be the case.

What about property and commodities?

The more observant among you may have noticed that we seem to have lost two asset classes in the last few paragraphs, namely property and commodities.

There a few reasons for this. First of all, annual return figures for shares are a lot easier to measure. Property figures are complicated by factors such as rent and how to account for maintenance costs.

It's also a lot easier to buy and sell share-based investments, as we'll see later. You can't just sell one room of a house for example and property transactions can take months to complete.

The indications are that investing in property and commodities is likely to give you a similar long-term return to equities. So all three types of asset are well suited to long-term investment plans.

Property investing, via buy-to-let, is obviously very popular at the moment and benefits from the fact you can 'gear up' your investment by putting down a small deposit and borrowing the balance of the price. This can magnify your returns over the long term although it does add additional risk as you have to continue to find money to pay interest on what you borrow. Property does have another advantage over equities in that returns tend to be less volatile and it has been much rarer for it to fall in value over the course of any given year.

Commodities are somewhat of a curiosity. They tend to have long periods of poor returns followed long periods of good returns. After many years in the wilderness, they have recently undergone a resurgence. The price of oil and gold, for example, is a lot higher than it was ten years ago. Investing in commodities is not as easy as investing in shares however.

How to invest in shares

The main reason the Motley Fool favours shares as a type of investment is ease of use. You can buy and sell quickly and cheaply and in more or less any amount you want.

So how do you get involved? You can invest directly, buying and selling shares in individual companies such as BP and Vodafone. If you have the time, and lots of discipline, this can be best way to go.

Many people feel more comfortable getting a fund manager to do the investing for them. You can get funds that invest in particular markets such as the UK, US or the Far East. You can also get funds that invest in certain types of industries, such as biotech or mining. You can get even funds that just invest in smaller companies (as there some who believe that small companies offer greater potential returns).

As a rule, you pay up to 5% as an initial fee when you invest and around 1.5% each year to the people who manage these funds. There is a cheaper alternative - you can invest in funds where the decisions about where and when to invest are made automatically according to a strict set of guidelines and not by an overpaid fund manager!

Typically, these sorts of funds, called index trackers, will cost you nothing in initial charges and around 0.5% a year. Over the course of, say, twenty years these lower charges mean you end up keeping a lot more of your money.

Lower charges mean index trackers perform better than most other funds (often called managed funds). Indeed, over a period of five years, an index tracker is likely to beat 75% to 80% of other funds. Over longer period, it's likely to do even better.

 

 

Why I'm Playing the Smart Phone Tsunami Right Now

If you've ever tried to use an iPhone in New York City, you know firsthand how badly wireless networks need to be upgraded.

Speaking from personal experience, it's miserable. Some estimates say 20% of AT&T calls are dropped in the Big Apple. The 3G network crawls at times. Check out this spoof AT&T ad about dropped calls (warning: involves explicit language). There's even a Facebook group called AT&T Sucks boasting 445 members.

People aren't happy with slow wireless, and providers are being forced to upgrade to meet demand. The market is projected to grow at an astounding annualized rate of 131% until 2013, as this chart from Cisco shows:

Growth like that should set alarm bells off in your head.

Because certain companies are going to make a killing off this inevitable — and huge — wireless upgrade cycle.

One of them is Tellabs (NASDAQ: TLAB), and I think it's a buy here. Let me explain why.

First off, Tellabs is a $2.6b company sitting on $1.3b in cash. Debt is minimal at $268m. They're profitable and the company just started paying a dividend this quarter (current yield: 1.2%). Their balance sheet is immaculate. Management has been on a cost-cutting crusade over the past year and is now shifting the company's focus to high-margin products.

Tellabs also happens to be very well-positioned for the wireless data build-out. TLAB sells products that improve data flow — for both wired and wireless markets. They sell products that improve performance and lower costs for mobile carriers, internet service providers, and traditional voice companies.

While TLAB should also benefit from the wired broadband market, wireless is where the real growth is at. Demand for their wireless data management products soared 52% last year. According to Reuters, Tellabs CEO recently said at a recent conference that he expects 60%-70% growth in 2010.

Smart Phone Tsunami

Smart phones like Apple's iPhone are pushing wireless networks to the breaking point. Customers are using more data than expected, earlier than expected.

Apple took the industry by surprise with the iPhone; it was the first mobile product that's truly fun to use on the web. But they're not the only company with a great web phone anymore... Their lead is slipping, and demand on 3G and 4G networks will only get heavier as competitors like Google and PALM catch up.

Tellabs has products to help solve these data problems. One of their new releases — the Smart Internet Breakout Gateway — is a good example. The name is a mouthful, but the product has big potential. The Gateway routes traffic and data more efficiently through mobile networks, saving bandwidth and improving performance. It's currently being tested by major mobile operators.

The company said in a recent press release: "Users want fast mobile data, so operators must prepare their networks for the mobile Internet tsunami," said Rehan Jalil, senior vice president, mobile Internet at Tellabs. "Tellabs' Smart Internet Breakout Gateway enables operators to handle traffic easily while reducing their costs dramatically."

The Whole Package

TLAB has just about everything I look for in a best stock: a rock-solid balance sheet, a strong growth catalyst, and a dividend (albeit a small one).

There's also some buyout potential, but that's not on top of my list. Tellabs has great technology, a portfolio of intellectual property (patents), and a pile of cash. When recently asked about takeovers, the company's CEO said, "There have been inquiries over time but we are still a standalone company and we like it that way and so do our customers."

So a buyout may not be on the table in the immediate future, but it's always a possibility. Small strong companies like TLAB are attractive acquisition targets. Especially with giants like Cisco sitting on $40b in cash...

If the price were right, I'm sure the board would come around.