Wednesday, March 26, 2014

when you're gone

Having beneficiaries on your bank and investment accounts is an important and useful tool for managing your estate when you're gone. Most tax deferred accounts, such as 401(k)s and IRAs, require a beneficiary be listed on the account, but it is possible to name beneficiaries for almost any account you have.

There are two types of beneficiaries - primary and contingent. You can designate any share of the account to any number of people under either of these types. For example, you may want to put a spouse as sole primary beneficiary, so that if something should happen to you, they get the entire account, and put children as contingent beneficiaries, so that if something should happen to you and your spouse, your children split the account.

It is important to review and update your beneficiary information to make sure it is relevant. If you have recently gotten married, divorced or had children, you should check and see who you have named as beneficiaries. Often, a young person starting a job may put a parent or sibling as a beneficiary. If this is not changed, children or spouses could be left out accidentally.

One neat benefit of using named beneficiaries on an account is that it avoids probate. While probate in itself is does not have to be a big deal, it is a time consuming process that can be avoided with a little bit of work now. To inherit an account a beneficiary typically just has to produce proof of ID and a death certificate. Be sure that your named beneficiaries are still the ones you want to inherit your accounts, as this is a fairly final act.

Some states require that your spouse either be sole primary beneficiary or consent to being left off. Mississippi does not require this, but check with the custodian of your account to be sure.

Take a moment to think about your estate and what will happen when you are gone. Naming beneficiaries eases the transition process, but just make sure it is going where you want it. This is your last chance to have a say in it!

Friday, March 21, 2014

Payday Lenders and The Post Office

Did you know that the average rate on a payday loan is around 600%!?!

Payday lenders and pawnshops both fit into the category of financial intermediaries. They are just as much a part of the financial system as your bank on the corner. Like banks, both make money by lending money. Unlike banks, they don't have depositors. Instead, their lendable cash comes from investors.

Pawnshops make loans that require collateral-- take in Grandma's wedding ring and get some ready cash based on its value. The buyback will be more than their purchase price, meaning your interest charges are built into the transaction. Of course, if you default on the loan, they sell the ring! A win-win for the pawnshop guys.

Payday lenders don't require collateral, only a post-dated check. Because there is no collateral, the implicit interest rate on these loans is, generally, higher than the pawnshop. Both are designed to be short-term loans.

Each state sets the rules for payday lenders operating within their borders. Four states don't allow payday lending: Arizona, Arkansas, Georgia, and North Carolina (interesting that 3 of the 4 are southern states). One state, South Dakota, has a no holds barred policy on these institutions.

In Mississippi, the limit on the total anyone can have at any one time in a payday loan is $500. Average cost for this cash advance loan is around $20 per $100 borrowed. Write a check for $500 and get $410 in cash. Later, the lender puts the check through to collect the full $500 ($410 for the loan and $90 for interest).

The small dollar amounts make them seem trivial, but the short-term nature makes this an expensive way to go. Do the math on the dollar fee and the term of the loan, and you'll see how you can get to 600%!

Lenders will time deposit of the post-dated check to match your next payroll cycle. If it bounces, they are only allowed to charge one $30 NSF fee.

Is this predatory lending? Well, they serve a purpose in the marketplace. There are folks who need money but have no access to banks or credit cards. The problem is that many become serial borrowers and get caught in a never-ending cycle of high interest loans. Payday lenders justify the high rate by pointing to the risk and high default rates among this population. What's the answer?

There is a proposal to go back to the old Post Office banks to serve this segment of the public. These would be government-sponsored banks that would offer loans to high-risk customers at more reasonable rates than the payday lenders. For an ailing P.O., this could be a win-win!

Monday, March 03, 2014

realized political risk

MSCI classifies Ukraine as a frontier market, that is, an underdeveloped, underinvested, 'more emerging than emerging' market economy. This keeps it out of most indices and funds and off of most investors' radar. Lately, however, Ukraine has been in the news over large anti-government protests that reached a dramatic crescendo as the olympics died down.

Since the collapse of the USSR, Ukraine's economy has struggled. It used to have a large and diverse manufacturing base, but failure to invest since 1991 has led to declining output. Poverty and corruption are also a big problem in Ukraine, leading to a large underground economy. Bribery and onerous regulations make it hard for legitimate businesses to emerge. In the capital, Kyiv, this underground economy is in plain view in markets right alongside the high-end shopping and restaurants that dominate the center of the city. Enterprising individuals offer their cars as taxis or open up stalls to sell clothes straight from factories or simply sell food on the curb. 


While the economy has declined, it's underpinnings are still valuable. Current economic problems stem largely from underinvestment and the drag of corruption. The potential for growth and investible business is immense here.


This corruption also highlights the great political risks of investing in a country like Ukraine. The former president Viktor Yanukovych strenghened ties with Russia by borrowing money and getting subsidized fuel in order to try and prop up the struggling state. This took an explicit turn away from trade agreements with the EU. Protests erupted over this and other aspects of his government, resulting in Yanukovych fleeing Kyiv to Crimea - a semi-autonomous region with much deeper ties to Russia than the rest of Ukraine. Crimea is home to a Russian naval base, and Russia has moved troops on the ground, ostensibly to protect Russian citizens there. It appears that the region is on the brink of actual war -  Russia has a history of inserting troops into former SSRs, and Ukraine is clearly no exception.


Political risk be realized in dramatic instances like this, but it's true cost is much more insidious. Political risk leads to economies being underproductive and investments being undervalued. For countries that are moving towards a more open, fair economy, the opportunity can be great.  As the drag of corruption eases, these economies can grow closer towards their full potential. Generally optimistic, I see frontier markets as an overwhelmingly positive long term investment opportunity.