I know, first thing you are wondering is FREE Iphone? WHERE CAN I GET IT!? Well, just hold on a few and read through. I was talking to one of my friends from work about viking death metal (no joke) and rock band (pretty much the best video game ever) and somehow the conversation drifted toward the 401k plan at our company. He said he had been dabbling in a few of the funds offered and seemed surprised when I said I was dumping 90% of mine (and my girlfriends) into our one index fund. So of course he asked me why? Well, its very very simple. Nearly every mutual fund available in our plan has an expense ratio greater than one.

What the hell is an expense ratio and why do I care?

The expense ratio is the percent of total assets that the investor is charged just to be in the fund. This is supposed to cover the costs of running the mutual fund…but honestly it really is how mutual fund houses and managers steal your money to make themselves multimillionaires. Here is the simple version:

Mutual fund from your 401k you are in:

BIG MUTUAL FUND: expense ratio: 1.50%

Lets say youve been working for a few years so you have 20k in your 401k. Lets say you get a return this year of 10%. Wow sweet an extra $2000! But wait a minute, your mutual fund that are in has an expense ration of 1.50 so they keep 15% of that. You only get $1700 and they keep that other $300.

Lets say you were instead investing in the index fund with an expense ratio of .10 (actual number for mine). Instead of the fund keeping $300, they would be keeping $10. That extra money, why, thats your free iphone right there. Ok so maybe you can’t actually pull that $300 out and buy an iphone (though you could if it was a Roth IRA) but you get the point.

But dont mutual funds make more money than index funds?
No, 85% of mutual funds fail to beat the market average.

Other types of expenses that mutual funds might charge:

Front-end load
This is basically a fee paid when shares are purchased. It is also known as a “front-end load,” and this fee goes to the brokers that sell the fund’s shares. Front-end loads reduce the amount of your investment. A good example is if you have $1,000 and want to invest it in a mutual fund with a 5% front-end load. The $50 you pay comes off the top, and so only $950 will be invested in the fund.

Back-end load
This is where the brokers take their cut when you decide to sell shares. This is even worse because they take part of your capital gains as well. Some mutual funds let you out of these if you stay with them long enough but its just one more robbery trick.

Level load / Low load
The only difference between level loads and low loads as opposed to back-end loads, is that this time frame where charges are levied is shorter.
Load of Crap
Most of the above fees.

My girlfriend is an avid supporter of E! network (or it could have been ET, I am not sure to be honest) and so I get a healthy (or unhealthy, depending on who you ask) dose of pop culture every day. Anyway they made a quick mention the other day of ‘The Federal Reserve cut rates, what do celebrities think of the economy?’ Well, I’m pretty sure most celebrities don’t care, but I can tell you what it means for you.

First off, what happened?
Earlier this week the Federal Reserve cut the prime lending rate by .75%, which is the interest that banks charge each other for short term loans.

How does it affect me?
The main benefit to consumers is that interest rates on almost everything will go down. Because banks are charging each other less, they can also charge you less. Mortgages, car loans, and even credit cart interest rates will all go down. This is great news if you are planning on making a big purchase in the short term. In fact thats what they WANT you to do…

So what is the idea behind a rate cut?
The idea is to free up peoples money so that they keep buying goods and invest in the stock market to keep the economy strong.

There are pros and cons to doing so and it really is just a temporary fix, but that will have to be the subject of a whole separate article.

When people think of personal finance, a lot of times one of the first things they think about is stocks.  We hear all sorts of things about the stock market, the DOW Jones, the NASDAQ and Wall Street but very few people have anything but a vague idea about what any of these things actually mean, other than “stock market is down, that is a bad thing.”

So what exactly is a stock?

A “stock”, or “equity” or “share” is the money and other capitol that is raised by a corporation through the issuance and distribution of shares.  Lets break this down a bit because that sentence in and of itself is fairly confusing.  What is basically is, is that corporations sell pieces of themselves to raise money for growth.  These pieces are stock.  If a company does well, it is worth more, thus it’s stock goes up.  They also pay out pieces of company profits to shareholders (people who own shares of stock); this is called dividends.   Its an interesting arrangement because lets say you buy a share of stock in Hewlett Packard.  You now own a piece of everything in HP.  A little piece of every contract, computer, desk,  and pen.  (The skeptics amongst us would even say the workers, but that’s a whole different conversation).Just because you own a share of stock in a company doesn’t mean you get to say what happens in day to day operations, but you do get a vote per share in electing the board of directors.    However, this is a minor detail.  Most people don’t WANT a say in the day to day operations of the company, they just want the company to do well.  As a shareholder you get a piece of the companies profits, and a claim on some of the assets.  The profits are sometimes paid out as dividends or it might be reinvested into the company for growth.  It all depends on the company. 

How is Stock Valued (How is the price decided)?
The value of a stock is loosely based on what investors feel a company is worth.  However this is not the same as the value of a company.  That is what is called its market capitalization…basically, the stock price multiplied by the number of total shares of that company.  Confused?
Well here’s the first grade math formula to clear it up:

Total worth of company = (cost of 1 share of stock) X (total number of shares of stock of that company)

For example, a company that trades at $10 per share and has 10,000 shares is worth $100,000.
What makes things even more complicated is that the price of stock just include what the company is currently worth but ALSO the growth that investors expect in the future. 

A lot of the so called “value” of stock prices are based on the simple concept of supply and demand.  If the stock is in high demand, the price goes up.  If the company seems to be doing poorly, less people want it, so the price goes down.  Not such a hard concept after all!

So how do people know whether the company is doing well or not?  The single most important factor that affects the value of a company is its earnings.  Earnings are the profit a company makes.  This is why public companies have to report their earnings four times a year.  These times of year are called earnings seasons and it has the guys on wall street scurrying around like mice in a cheese factory.  Companies have to (or are supposed to *cough enron cough *) be honest in their reportings.  If a company does well, the price of their stock usually goes up, if they do poorly, it usually goes down.
There are some other factors that can change the value of a stock.  Sometimes there is hype for a company when it hasn’t done anything to prove itself.  The absolute best example of this was the dot com bubble in which online companies that were supposed to make a ton of money …pets.com anyone?…  made absolutely no profit.  Their stocks were artificially high, and then they came down to realistic levels, it left a lot of people out a lot of money.  There are a ton of other factors in stock price, but the fundamentals matter the most.