3/18/08

Bear Stearns and Broker Risk

We placed an ad at the Young Money website. The gist of the ad was that DRIP investing reduces market risk and removes broker risk.

When I passed the ad around the office for comment, everyone agreed that DRIPs reduce market risk. After all, we use DRIPs to avoid investing a lot of money at any one time. Therefore, we are less exposed to investing a lot of money at the wrong time. However, my mention of removing broker risk was more controversial. The consensus opinion was that the Fed would not let a brokerage fail. However, I made a successful argument for the reality of “broker risk” and the ad that we put up carries that statement.

Now, with the near collapse of Bear Stearns, which was until recently the fifth largest clearing brokerage firm in the country, broker risk becomes more easily recognized. If you hold your positions in a brokerage account, your ownership is reflected on the books and records of the brokerage. That risk doesn’t exist with DRIPs because your ownership is directly on the books and records of the company.

Of course, the U.S. government will attempt to stem any failures. But would you prefer to be on line at your brokerage waiting for government assistance to get at your holdings or would you prefer to own your shares in your own name?

Vita Nelson, Editor and Publisher

3/1/08
Investing 101:

Secrets of Low-Risk, High-Profit Investing

Successful investors rarely gamble. Instead they maximize profits and cut their risk in various ways… Now everyone can take advantage of risk-reducing strategies to provide for retirement.

You don’t have to be a stock market genius toend up with a fat, comfortable retirement. Nordo you have to tie your stomach in knots while riding a risky, roller-coaster market.

Normally, when you invest in a stock, you buy a specific number of shares and go through a broker -- either online or over the phone. For this service, you pay a commission. When you sell, you're facing another commission. If you are investing in a taxable account, you pay taxes on your long-term profits at 15%. (At a higher rate if you sell in less than a year.) If you are investing in a tax-deferred account, you pay taxes at ordinary income rates when you withdraw proceeds.

         "Buying and selling" -- which is speculation, not investing -- is based on playing the stock market. You gamble that prices will rise, and you're continually buying and selling on that assumption.

         Direct Investment Plan investing is very different (also known as dividend reinvestment plan or DRIP) -- because it provides a means for you to add to your investment over an extended period of time. Of course, you can still sell whenever you wish. But DRIPs are particularly useful for accumulating shares over a period of time. There are no taxes (except on the dividends—at 15%) until you sell.

         But the beauty of DRIPs is that you get more value for your investment dollar. You eliminate the broker, and buy your shares directly from the company.

         You pay a one-time fee to get enrolled, and for many fine companies you will not pay another dime ever again when you buy stock in that company. No fees...no commissions...nothing. In other words, every dollar you invest goes directly into your investment, which doesn't get diluted with extra charges.

         Thus, a "direct investment plan" = buying directly from the company. You cut out the middleman, and this is particularly important if you are a small investor. After all, by making small, regular investment in several different companies through a broker, the commissions might account for more of the investment than the stock itself. A poor way to save!

         How many companies offer this direct investment plan? More than 1,300 companies, many of them among the finest companies in America, assist shareholders by giving them this option to buy additional shares in this way. Plans vary with each company, and they make investing very easy.

         Once you are enrolled in a company's DRIP, you can make additional investments by sending funds to the transfer agent with the tear-off portion of the statement that will be sent to you after each investment. In general, investments can be as little as $25 and as much as $5,000. They can be sent by check, by money order, and many companies will also automatically debit funds from the investor's bank account.

DRIPs are a safer way to build retirement assets

         Many people get burned as investors. They buy at the top, and sell at the bottom. That's because emotions play such a large part in investment decisions. And while it's human nature to try and "beat" the market, it rarely works.

         DRIP investing can help you win this battle with your emotions. With wide diversification, when some of your stocks are lagging, other may be gaining. That way, you won't feel so much pressure to sell the laggards. (On the contrary, you would want to be buying those shares when they are lagging, not selling them.)

         With dollar-cost averaging, you can impose discipline on your investing. You decide in advance how many dollars you intend to invest, and how often. Then you continue on this schedule, regardless of the market price of your shares at any one time.

         These strategies are especially important right now, given the volatility of the market and the stress associated with bull and bear markets.

         When the first sign of a bear market appears, many new investors are inclined to panic and sell. Remember, bear markets are a normal part of investing—but it can devastate those that are speculating on the short-term direction of the market. Although the stock markets have historically returned 10% - 11% annually, that average return includes many great years, along with a fair number of negative ones as well.

         Thus, patience is an important commodity for investors--and dollar-cost averaging with wide diversification of companies within a wide diversification of industries makes it easier to withstand the temptation to act impulsively.

How to Take Advantage of the DRIP Investing Strategy

The Moneypaper and its affiliate, the Temper Enrollment Service, have been pioneers in the area of DRIP investing. The DRIP enrollment service offered by Temper of the Times Investor Services Inc. has opened more than one million DRIP accounts in any of about 1,000 different companies. More than one million copies The Moneypaper’s Guide to Direct Investment Plans has been sold.

The Moneypaper, and its affiliated companies, have been cited as a source of information for individual investors by The Wall Street Journal, Barron’s, The New York Times, Los Angeles Times, Kiplinger’s, Bottom Line Person, The Boston Globe, among many others. This service is the acknowledged authority on the operations of company-sponsored direct investment plans