Mailbag for Friday, March 2, 2007

Marketplace Staff Mar 2, 2007

TESS VIGELAND:
I’m Tess Vigeland. And I’ll attempt to solve, along with economics editor and personal finance expert Chris Farrell, of course, all your pressing financial questions. Hi, Chris.

CHRIS FARRELL:
Hi. How are you doing, Tess?

VIGELAND:
We’re doing all right. Before we get started, we’d like everyone to take down our Web site address. It’s Marketplace.org. Click on the contact button. Or you can call us at our phone number. It’s 877-275-6669, that’s 8-7-7-ASK-MONY, and we spell that M-O-N-Y. Chris, right now, let’s start off a little bit unusually and reach into the e-mail bag, if that’s all right with you.

FARRELL:
Of course.

VIGELAND:
Tim wrote all the way from Saint Gilles, Belgium. He and his wife are in somewhat of a dispute. I hate to hear that over our little show. But Tim is wondering what the lyrics are to our mailbag theme? All right, now, he thinks it goes like this. Got a box full of letters. Taken my life to read. But his wife, swear as it says, got a box full of letters. Think you might like to read. They listened to it repeatedly, as have we. But there is no let up from either side. And there’s no let up from our side as well. Chris, who is right?

FARRELL:
Well, I went through my Wilco phase, Chicago-based band.

VIGELAND:
All right.

FARRELL:
Roger Wilco, always loved their name. And the wife is right.

VIGELAND:
She is?

FARRELL:
Got a box full of letters. Think you might like to read.

VIGELAND:
Think you might like to read. All right. Done. Well, I guess we’re done, Chris, then.

FARRELL:
We do personal finance, we do music, what else do you need?

VIGELAND:
Oh, no. You know what? I think we have a couple of callers who’d like to talk to us, actually. All right. MARIA: is on the line from New York, New York. Hey, MARIA:.

MARIA:
Hello.

VIGELAND:
How are things going out there in the Big Apple?

MARIA:
Not bad.

VIGELAND:
You staying warm?

MARIA:
Trying.

VIGELAND:
All right. Well, tell us a little bit about yourself.

MARIA:
Well, I’m a newly minted attending physician. Been out of residency a couple of years.

VIGELAND:
Terrific. Well, congratulations on making it through all those years of med school.

MARIA:
Oh, I know. Thanks.

VIGELAND:
And, so what’s your question for Chris?

MARIA:
Well, I needed to help my parents out. They have owned a house. And due to, you know, bad circumstances on their part, they basically could not afford a nicely rated mortgage for their house. The bottom line is I signed the mortgage with my mom for the house. But my parents are the ones who make the payment. So I would like to know how to protect myself. I wanna get out of being on this mortgage, out of being on this deed.

VIGELAND:
All right. Chris, anything she can do?

FARRELL:
Sure. There’s a couple things. So you, what we call, co-signed the loan. In essence, what you have to do is get rid of the loan, either through a refinance or through a sale. There is–some people will tell you that, you know, if it’s a borrower in good stead and your parents are making the payments that the lender, typically, after six months or a year, showing that they’re making their payments will release you from the co-signing, you can at least ask there’s no reason why. All they’re gonna do is say no. But typically, they are gonna say no because it’s extra security for them, and why would they release you.

MARIA:
So how do you tell the bank that, listen, this whole time, it was my parents doing it? Like, how do you prove that?

FARRELL:
Oh, because it’s their name on the check.

MARIA:
Oh, I see. Okay.

FARRELL:
That’s very easy. They just look at the check, and they see that it’s your parents that are making the payments. So there’s really no issue there. That’s very, very easy to prove. They just pull that right up on the computer.

MARIA:
Okay.

VIGELAND:
MARIA:, have you done refinancing before with your parents?

MARIA:
Let me see. It’s been four years. We’ve refinanced it now, I think, three or four times. But always, you know, me being the person on, you know, the paperwork.

VIGELAND:
Why, can I ask why are you on the paperwork? Is it a matter of income level for your parents, or just security on their part?

MARIA:
Well, they’re, my dad is self-employed. You know, his income security is not very stable. But the other issue, too, is because of his business dealings and, you know, whatnot. Between the two of them, their credit score is just, you know, not very good.

VIGELAND:
Have you talked to your parents about this? Do they understand your concern?

MARIA:
Oh, yes. It’s a great source of friction. But that’s like a whole other discussion. But…

VIGELAND:
Sure.

MARIA:
I guess, what I’m wondering is, you know, I’m kind of wondering like worst-case scenario. Let’s say, they’re not able to make the payment. I guess I’m wondering like, what do I say to the bank? I’m like, listen, this is the situation.

VIGELAND:
Right. So what happens if they default on the loan and MARIA: is a co-signer on that loan?

FARRELL:
Maria, they’ll go after you.

VIGELAND:
Yep.

FARRELL:
It’s your loan. They don’t care why you went into it. They don’t care why it’s, there’s any problems. All they care about is, one, that the payments are made. And two, if the payments aren’t made, they’re gonna go after whomever they can go after to get those payments. So you end up in default or in bankruptcy.

VIGELAND:
Not easy choices, Maria.

MARIA:
No. They’re not.

FARRELL:
No, and I think that this is, and it sounds like you’ve had this. It’s a lot of friction. These can be extremely difficult circumstances. But I think you do need to get yourself out of this mortgage. Perhaps, there are some other ways that you may be able to help them out to smooth out their income.

VIGELAND:
All right. Maria, I hope that helped, and good luck. And let us know how it goes, would you?

MARIA:
Yeah, Sure. Thank you.

VIGELAND:
Thanks for calling.

MARIA:
Bye.

VIGELAND:
All right. Chris, well, let’s hit the e-mail bag again. And Steve from La Crescenta, California, right down the road from us here in LA, says he’s been involved in the stock market for about 10 years. He’s got both mutual funds and also some individual stocks. But recently, he’s been doing some research, mostly on the Web site of the Securities and Exchange Commission, excellent bedtime reading. And he’s thinking about expanding into the options market. But he wants to know what’s the best way to start trading options without getting too carried away. Now, first of all, why don’t we explain really quickly what options are?

FARRELL:
Yeah. Basically, what options are, a call option is the right to buy a underlying security at a certain price of the stock. And a put option is the right to sell a security at a certain price. Let’s say you have, you know, the Tess Vigeland stock. And I think it’s gonna go up. So I put $100 down. Buy myself an option that I can buy that stock at $26 a share.

VIGELAND:
Okay.

FARRELL:
All right. Let’s say it’s trading at $25. All right. And you go do $30 a share. And as we get close to that period of time, I sell my option, which is more valuable. Or what I can do is buy the stock at $26, sell it at $30, pocket the difference, right? So it’s kind of a fun game. Now, of course, markets don’t always go the way you think they are. But the thing–the reason why I think this can be fun, we’re talking entertainment money. You’re not putting your retirement, your children’s college education, what I’d be weary off is go into Google, and you know, type in options. And you know what, you’re gonna get a lot of hoaxter sites. Be weary. Everyone that I know that does options, at the end of year, they don’t have anything to show for it.

VIGELAND:
Uh-oh.

FARRELL:
But they had some fun along the way.

VIGELAND:
All right. If you’ve got other questions, we’ve got the answers. And the best part, it’s really very simple. Just give us a call. We’ll try to help out. Click on the contact button on our Web site, Marketplace.org. Or call us at 877-275-6669. That’s 877-ASK-MONY. And let’s take another call. We have Jamie on the line from Chapel Hill, North Carolina. Hi, Jamie.

JAMIE:
Hi. How are you doing?

VIGELAND:
Very well. Thank you. And you?

JAMIE:
Yeah. I’m doing well.

VIGELAND:
Great. Tell us about yourself?

JAMIE:
Well, I sort of lead a dual life. I have a day job in the computer industry and retail. And I have a sometimes night job, sometimes, afternoon job as a conductor and a musician. So my finances get a little bit complicated in that. On the one hand, I have, you know, a steady income that comes with a W2 and regular benefits. And on the other hand, I have some really erratic income that sometimes comes with a W2, sometimes it doesn’t. And…

VIGELAND:
All right. I’m guessing, since we’re talking about W2s that, it is tax time. And you got a tax question for Chris.

JAMIE:
Yeah. I have a sort of two-part question. On the one hand, I’m struggling to figure out when it makes sense to deal with the complicated deductions, and how that would fit in, given that I have all these expenses/income from something that is not my day job.

VIGELAND:
JAMIE:, have you already figured out whether the expenses that you’re paid for would exceed your standard deduction?

JAMIE:
Well, I could tell you that I’ve spent several, several thousand dollars trying to be a conductor, essentially. So…

VIGELAND:
Okay.

FARRELL:
Okay. My first piece of advice is, you know, this is a case where at least maybe for the first year or two, I would work with a professional. And in a lot of communities, there are professionals that do a lot of work with artists, freelance writers, freelance musicians. And the big advantage of working with a professional is that they will really help you think through what expenses can you deduct, what can’t you deduct and that can be your best investment. And it won’t be that expensive and will pay off.

FARRELL:
And then, once you have a year or two, then if you wanna start doing it yourself because you realize what’s going on here and the computer programs increasingly sophisticated that’s fine. Second point that I would make is setting up a system for tracking your expenses, not just for taxes, but it’s a way for you to look at your activities and yes, you’re enjoying this and–but you’re also trying to make some money at it. You’re an artist, but you’re a businessperson. And so you’re creating a spreadsheet and since you work in the computer side of business, I’m assuming that’s gonna be like second nature to you.

JAMIE:
Right, yeah.

FARRELL:
So I think, I really, really would strongly emphasize just tracking all of your expenses. And for anyone who’s listening to this, you know, come up with a system. For you, as I said, computers may work. For other people, maybe it is the shoebox or the bucket. I mean, I tend to more toward the bucket effect, but at least I know where everything is.

VIGELAND:
So Jamie, does that help you out?

JAMIE:
That helps a lot. Thanks very much.

VIGELAND:
All right. Well, best of luck to you and keep on with the music. That’s great.

JAMIE:
Thanks.

VIGELAND:
Well, freelancer or full-time contractor or full-time employee, I’m sure you’ve got lots of questions for us. And we’d love to hear from you. Give us a call. It’s 877-275-6669. That’s 877-ASK-M-O-N-Y. Or visit our Web site Marketplace.org and click on the content button. This is Marketplace Money from American Public Media. All right. Chris, one more reach into the e-mail bag. We’ve got Mike from Indianapolis, Indiana, writing in. And he knows you’re a big fan of indexing. But he wants to know what you think of something called fundamental indexing. He’s wondering if this could be something that you could use in a pretty simple investing portfolio. What do you think?

FARRELL:
The answer is yes. Now, if you…

VIGELAND:
First, first, let’s define it. What is it?

FARRELL:
Your traditional indexing is like your Standard & Poor’s 500. And the jargon term is that’s a market cap weighting. So the bigger the company, the more valuable it is in the market, the bigger impact it has kind of what the S&P 500 does. Fundamental indexing, which has been developed by Jeremy Siegel and Robert Arnott, is another pioneer in this area. They might be using dividends as the most important factor in terms of how they create these indexes. There is a genuine difference and what they’re moving away from is the market cap weighting of the traditional indexes. Now, if you go online and you put in John Bogle or Burton Malkiel, they defend traditional indexing. If you put in Jeremy Siegel, Robert Arnott, they defend fundamental indexing.

FARRELL:
It’s the new way to do it. I don’t care which one you do, and here’s the reason why, they are both better than hiring an active money manager in a plain-vanilla basic mutual fund. They both basically support the same type of investing. It’s largely passive. It’s broad-based. You’re exposed to a big chunk of the equity market. So I actually, in a very practical sense, don’t care which one you do. That’s fine. What I’m skeptical about is that you’re gonna go with mutual fund, X, Y, Z that’s gonna charge you, you know, one and a half percent to be managing this portfolio and that this professional money managers are really gonna be able to, year after year, outperform the market. I’m skeptical.

VIGELAND:
All right. Well, that’s all the questions we can take on this week’s show. But please do leave your question for our future program on our voicemail. It’s 877-275-6669. That’s 877-ASK-M-O-N-Y. Or visit our contact page on our web site marketplace.org. Thanks for the help, Chris.

FARRELL:
Thanks, Tess.

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