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  • Starting a Self Directed IRA

    In previous posts, we've mentioned that borrowing money against your retirement plan is generally a very bad idea. A self-directed IRA is something different: it allows you to use your retirement funds to invest in your business. Why would you want to do this?

    Using a self-directed IRA to avoid capital gains

    As we've discussed, the nice thing about a Roth IRA is that your money grows completely tax-free; thus, it's a particularly good vehicle for income sources that would otherwise be heavily taxed. If you're working hard on your business and growing it rapidly, you may be seeing a large return on your investment, which you're then taxed on. If your Roth IRA owns most of the business stock, then not only did that give you access to your IRA funds for business capital, but the return from your business will be tax-free!

    Of course, this does mean that you can't touch the money until you retire, so be sure to keep enough income coming your way to live on!

    Avoiding trouble with the IRS

    The IRS wants to make sure that your IRA really is using to save for retirement, rather than just for avoiding taxes now. To avoid trouble with them, read through the list of prohibited transactions and be very careful to avoid anything on it, as breaking the rules here can result in losing the tax-favored status of your account! Among other things, this means that your parents, children, and spouse are not permitted to invest their IRAs into your business (although your friends and siblings can). Also, you may not borrow money from the account, sell property to it, or use it to buy things for your own use. You're also not allowed to own more than 50 percent of the business you invest in, and you shouldn't invest in an S corporation or general partnership. If you don't have a business yet, you can also use your IRA to buy one, although this may subject you to the unrelated business income tax.

    One nice thing about having people invest in your business through an IRA is that the structure of the retirement plan discourages them from pulling out their investment early, which can be a big help for your business. A self directed IRA does require that you use a special custodian; depending on where you set up your retirement account, your custodian may limit you to certain types of investments (mostly ones the bank sells) or may allow you to invest wherever you like and simply handle the record keeping.

    For more information on  self-directed IRAs, refer to section 408 of the internal revenue code.

  • The Gold Confiscation Scam

    If you've been considering investing in gold, and have been doing your research, you've likely run across a number of warnings from dishonest dealers that you should buy collectible gold coins rather than bullion, as the collectible coins are safe from government confiscation; they then cite executive order 6102, issued by Franklin Roosevelt in 1933.

    There are a few problems with the story. The first is that, contrary to the claims you'll hear, the federal government never confiscated gold; while citizens were ordered to surrender gold, they were fairly compensated. Additionally, there was only one prosecution of someone failing to comply with the order, and it was unsuccessful.

    Furthermore, the purpose of the executive order was to get people to stop hoarding gold at a time when America was still on the gold standard; Roosevelt was attempting to prevent a run on the banks. Accordingly, there's no particular reason to think the government would attempt to confiscate anyone's gold, which is why the American Numismatic Association describes this as a non-issue.

  • Should You Buy Gold Coins?

    If you were to ask us flat out, "is gold a good investment?", we'd have to say no. Historically, gold has vastly underperformed the stock market; indeed, if you had invested in gold 30 years ago, you'd have about the same amount of money now as if you'd just bought government bonds. Not exactly outrageous earnings, there!

    However, if you do decide to buy gold, we want to make sure you get the best deal. Perhaps the most popular way to buy gold is with gold coins; aside from the value of the metal, you also get a nice collectible. Additionally, because coins are standardized in a way that gold bars are not, it's much easier to assign the correct value to them, and they are also more difficult to fake.

    Gold coins have been around for a long time; the first known example is the coins minted in 670 BC by King Gyges of Lydia in Turkey. Generally investors will buy gold bullion coins, which have their gold content guaranteed; while these coins are legal tender, their real value is based on the current value of its gold content; as such, a 1-ounce gold bullion coin will generally sell for the same price as one ounce of gold, plus a small premium. Again, the main draw of a gold bullion coin is that it's an easy-to-obtain form of pure gold whose authenticity is guaranteed by the country minting it.

    There are a lot of fraudulent companies trying to sell gold coins, so it's important to do your homework; most importantly, never let a salesman rush you into a purchase.Once you've purchased your coins, if they are not bullion it's a good idea to have them graded as soon as you get them; even if they come with a certificate, the certification may be from a dishonest grader or one that uses looser standards than commonly accepted. Bullion coins do not need to be graded because they are being purchased for the gold value, not any collector value. As with any major purchase, always comparison shop to be sure you're getting the best price.

    Another thing to be aware of is that dealers will likely quote appreciation rates from the Salomon Brothers Index, which is a legitimate index that used to be compiled by the New York investment bank Salomon brothers and can show very high appreciation; however, this list was based on very rare coins, not the more common ones the average investor is likely to purchase. Again, the value of gold bullion coins is based on the market price for gold, rather than any particular rarity of the coin.

    There are a few professional organizations you may find useful as you get started in coin collecting. The American Numismatic Association offers a number of educational programs for collectors, while the Professional Numismatists Guild consists entirely of coin dealers who have a minimum net worth ($250,000 in coins) and number of years of experience and who have agreed to submit to binding arbitration through the PNG in case of complaints.

  • Using the Moving Average

    One of the most popular forex indicators, moving averages are also one of the simplest to compute; however, professionals are always coming up with new strategies for using them! Here are a few of the basics.

    Recall that the moving average is used to show the market's momentum. We can take the simple moving average, which is just the average closing price over the time period we're using. We can weigh the average, with more recent prices having greater weights; depending on how much more importance we want to place on recent events, we can use either linear or exponential weights. We also have the option of using all past prices, rather than just a limited number, but giving those in the distant past very low weights.

    Moving Average Strategies

    There are three standard methods that underly most strategies for interpreting the moving average. One of the most common occurrences is a crossover, meaning that the price has risen above or fallen below the moving average; in other words, the current price just crossed the average price. While this isn't incredibly useful, it can help when combined with other predictive methods.

    While the moving average measures trends in the price, it can also demonstrate a trend itself; moving average trends can be used to decide when to buy or sell a currency. Again, this indicator is not particularly reliable by itself, but can be helpful when used in combination with other indicators.

    The disadvantage of the moving average is that it takes time for a market event to show up, at which time it may have already ended. The advantages are that the moving average indicators are simple and easy to use; while they shouldn't be used as the sole indicator, they can certainly provide support to decisions based on stronger indicators the trader may have available.

  • Forex Indicators

    While major banks may be able to make money off of forex trading based solely on the spread, individual investors generally need to be able to predict how the market is going to move in order to make a profit. As you might imagine, there are a lot of very smart people trying to figure out how to make this prediction; in this post, we'll briefly mention a few indicators that forex investors use.

    Before we start, let's be clear on exactly what a forex indicator is. Indicators are used to find patterns; while the currency market is very chaotic, it's possible to find various inputs that will have a somewhat predictable effect on the market, and thus we can use indicators to predict how the market might behave. Naturally, different indicators will pull in different directions, contradicting each other; while it is tempting to attempt to use as many indicators as possible, perhaps a better approach is to find a half-dozen strong indicators and move only when almost all of them are in agreement.

    One of the most popular tools is the moving average, which represents the average value of a currency over some specified time period,ending with the current date; as such, the average constantly changes over time, representing the market's momentum. There are a number of different moving averages; they include:

    • The simple moving average takes the average closing price over the duration of the chosen period, with no weighting or smoothing
    • The exponential moving average gives greater weight to more recent prices
    • The smoothed moving average is similar to the exponential average, but while older information continuously receives less weight, it is never discarded altogether
    • The linear regressed moving average, like the exponential moving average, gives more weight to recent prices, but uses linear weighing factors rather than exponential ones

    This post will be updated to explain other indicators in the near future.

    • What is FOREX?

      If you spend much time reading financial blogs, you've probably seen the term Forex thrown around more than once. Forex is short for the foreign exchange market, which is used for trading currencies; this allows businesses to convert their cash on hand from one currency to another, allowing them to pay for goods from another country in the currency of that country. Many people attempt to make money by guessing how one currency will fare against another; essentially you use one currency to buy another currency, with the expectation that the second one will be worth more. The foreign exchange market is the largest market in the world, and the most liquid.

      Forex is particularly popular because it's easy to get started and the market operates 24 hours a day, except weekends. In April 2010, average daily turnover was estimated to be $3.98 billion, of which $1.005 trillion was spot transactions (where currency is bought for immediate delivery, defined to be two days from when the trade is executed, or one day when swapping US dollars for Canadian dollars), $362 billion was in forward contracts (which amount to going long or short on a currency), and $1.714 trillion was Forex swaps (where equal amounts of the same currency are bought and sold, but for different times); the remaining $129 billion was not correctly reported. 34.1% of this trading occurs in London, 16.6% in New York City, and 6.0% in Tokyo. As brokers and dealers negotiate directly with one another, there is no central exchange; however, quoted prices are usually the London market price. The market is dominated by large traders, including banks and governments; the 10 largest traders account for 77% of trading volume . Generally these large traders are continually buying and selling currencies; the difference between what they buy currency for and sell it at is called the bid/ask spread. Generally, the currencies are traded in units of at least 100,000.

      Another option is carry trade, where investors borrow currencies with low interest rates and use them to buy more expensive currencies;  in the past, it was particularly popular to borrow yen (as the Bank of Japan set very low interest rates) to exchange for US dollars. This trade collapsed in 2008, leading to the rapid appreciation of the yen; this has been partially blamed for the credit crunch that lead to the financial crisis.

    • Cash Flow Notes

      A cash flow note is a contract wherein the borrower promises to repay the lender; essentially, you are trading a lump sum payment now for the promise of a continuing stream of income later. There are a number of common types of cash flow notes, discussed below. Like any other asset, they can be bought and sold; some are fairly complicated, and all should be purchased only after completing due diligence.

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    • Is Gold A Good Investment?

      If you listen to talk radio, you've no doubt heard that you should be investing in gold. If you're the cautious type, you might also have noticed that the people who tell you that, tend to have a lot of advertisements for places that sell gold. So are they just BSing you to sell ads, or is gold a good investment?

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