Author: A.T.

“My father told me you could stop paying social security and forfeit all the money you’ve already paid in,” writes young Michael Mattox. “My friends say this isn’t true. Since I’m 24 and maxing out my 401k, I think I’d be better off investing the extra $200/month I pay in Social Security taxes into a non-deductible IRA. So the question is, is this true? And if not, WHY NOT?”

The answer is: no, it’s not true. No one can opt out of the Social Security system. Your dad’s wrong. Your friends are right.

And the reason is: It’s a law. You’ve got to pay Social Security tax.

And the reason for that is that the system needs cash from current workers to pay benefits to those already retired — your grandparents and, one day, your father.

Exceptions:

There are a few Americans who don’t participate in the system, most notably railroad employees. Even today, if you go to work for a railroad, after 10 years’ service your social security files get sent over from Washington (or wherever) to the railroad and you’re covered under the railroad retirement system. Toot! Toot! So I suppose you could always leave your current employer and go to work for Southern Pacific (or whatever it’s called now) and opt out of Social Security that way. At least I . . . think . . . you . . . can, I think you can, I THINK you can, ITHINKYOUCANITHINKYOUCANI…

Federal employees hired before 1984 are covered by the civil service system. And employees of a relatively few state and local governments, which opted out of Social Security, are not part of the system. You could try to find one of those and go work there. But Congress forbade any further government entities to bolt from the system — and odds are new legislation will one day pull even those back into the system.

I recognize many of you are internexperts, while I barely know which end of the surfboard faces front.

But for those of you who, like me, are just beginning to get the hang of it, I have a suggestion. Go to http://my.yahoo.com/ and set up your personal Yahoo page. It’s really easy, free, and allows you to put on one “page” all the stuff that really interests you. Up to 30 stock symbols (including some really obscure ones that not all stock-quote services handle); the weather for cities that interest you; stupid sports stuff; and headlines in various fields, which you can then click to see the full story.

It’s similar to Pointcast, which is also amazing, but which makes me nervous. It keeps popping up as a screensaver, a feature some people love but I don’t. Pointcast requires that you click to get the particular page — news, sports, weather — you want, whereas My Yahoo has it all there on one page. What’s more, Pointcast has a team of Wells Fargo horses, or some other 30-second animated ad, running across the top right frame of the screen to attract your attention — i.e., distract you. This is great for advertisers but not necessarily for you and me. (I suppose Yahoo will follow soon, but so far it’s peace and quiet by comparison.) Would you like ads in the middle of your movies? How about an ad that sprang into motion as you were reading an article in the newspaper?

It’s amazing to watch the web develop. This month, My Yahoo is a hoot. (The other way to get there is to go to the Yahoo home page and then, way at the bottom, at the left, click on the little blue “My Yahoo.”) Who knows what it will be next month?

Come to think of it, many of you probably know — and I trust won’t be shy in cluing me in to.

You know I don’t think you should be buying stocks on margin, though of course a “margin loan,” being cheap and, generally, deductible, is a heck of a lot better than a credit-card loan. Your after-tax cost of a margin loan, might be 5% versus 12% or 18% or 22% on the credit card.

The problem is that it’s too easy. With no one hounding you to repay it, or even “monthly minimum” payments required . . . you might easily let it slide. And then the market drops and, through the power of leverage, it hits you doubly hard.

So I advise people to avoid buying stocks on margin, and urge them to pay off quickly the occasional margin loans they might take as a convenience. (E.g., your year-end bonus comes in January, but your Christmas shopping can’t wait.)

Many people ignore my advice and carry fairly sizable margin balances. I certainly do from time to time. (Hey: if I followed all my own advice, I’d have nothing to write about. The wild risks I take are the selfless price I pay to amuse you.)

Which brings me to the point. I called my famous “full-service” broker and asked what interest rate they were charging these days. Then I called my deep discounter.

Guess what. It’s not just commissions where a deep-discount broker saves you money.

On anything under $10,000, Mr. Famous You’ve-Seen-All-Their-Ads Full-Service Broker currently charges 10-1/4%, which scales down to 10% up to $25,000, but only really gets good, at 8-1/4%, if your balance is over $100,000.

At my deep discounter, balances under $10,000 are charged 9-1/4% these days — and reach the magic 8-1/4% at $50,000.

(Note that margin interest rates can bounce around without notice, so to make a valid comparison, you need to call each broker the same day.)

Say you were almost as foolish as I am and ran a perpetual $20,000 balance. At Mr. Famous You’ve-Seen-All-Their-Ads Full-Service Broker, that would cost you $2,000 in interest a year. At my Deep Discounter: $1,750.

Assuming you can deduct the interest, the $250-a-year difference is less great. Still, one needs a good reason to borrow at 10% when an 8-3/4% loan is available around the corner.

You may have that reason (or your balances may routinely exceed $100,000, so you get the same rock-bottom rate you’d get from a deep discounter). But it’s one more factor to consider in your choice of brokers.

Now tell me this: the market is higher than it’s been at any time since a superheated gaseous cloud cooled into what we now call Planet Earth (not that I really buy this explanation), and you’re buying stocks on margin?

Be careful!

Love,

Dad

Tomorrow: My Yahoo vs Your Pointcast

I was in Washington for the display of the AIDS Quilt and was struck most not by the Quilt itself but by the dinner Friday night (although 38,000 panels stretching the length of the mall from the Washington Monument to the Capitol are not unimpressive, representing, as they do, about one panel for every ten of the 350,000 Americans who have now died of AIDS).

The dinner was held in the National Building Museum Building, which the first few times I visited it I assumed was some sort of bureaucratic parody — the National Building Museum Building?

I might also say that the first few times I visited — for the annual Medical Education for South African Blacks benefit, another fine group — this gargantuan space was only barely utilized, like a giant cardboard box in which you’ve collected all your toy soldiers in one corner. That was true even this past April, when billionaire international financier George Soros (bless his heart) was MESAB’s honoree. Barely a third of the floor was used for the benefit.

Not so this past Friday night. Every inch was filled with tables, to the point that fire marshals apparently had required tents to be pitched outside for the actual cooking — a sort of caterer’s bivouac. Fourteen hundred tuxes, dark suits and evening gowns, raising $1 million between them, seated at more than 150 tables of 8, each centered by a 3-foot candelabra, thousands of candles running the length of this colossal building, that had once been known as the “pension” building before it was turned into a museum but now, with all those candles, and with small portions of the Quilt hanging down from three stories, looked more like a church.

But that wasn’t what most struck me either.

I was most struck before we even entered the Building building, as we stood in line waiting to show our tickets and file in. (It takes a while to register 1,400 people.) We were a dignified group, not quite somber, but each filled with memories of a brother or a son or a daughter or a parent or a lover or a friend — or many of them — lost to AIDS. It was basically a giant memorial service.

And there across the street (this is the part that most struck me) were perhaps a dozen Christians quietly singing, holding up signs only one of which I could clearly read: 2 Gay Rights: AIDS and HELL! The group leader had a bullhorn and, in between the quiet songs, would say things like, “Sodomites, repent!”

What a great country. Here were these citizens, outnumbered perhaps 100 to one, safely and peacefully and selflessly doing what they felt Jesus called upon them to do — so they were feeling pretty good about the evening — and here were 1,400 friends and relatives of victims of a disease that’s now infected some 30 to 50 million (mostly straight) adults and children around the world doing what they felt called upon to do, also feeling good about the evening — indeed, the whole weekend.

If God was displeased by the Quilt, He wasn’t showing it in the ordinary ways. The weather all weekend was magnificent.

And then He pushed the Dow up above 6000.

Tomorrow: Margin Interest

I’ve always been fairly cold-blooded about “socially responsible investing” — the notion of shunning investments in companies that have subsidiaries in South Africa (back before the fall of Apartheid) or that make cigarettes or that make bombs.

I feel I’m as anti-Apartheid, anti-tobacco, and anti-bomb as most, but that limiting my investment choices will ordinarily do no good at all (except maybe to make me feel good), while reducing the returns I can earn and then contribute to fight Apartheid, tobacco or bombs.

I would never buy a new issue of stock or bonds from a tobacco company, because that might in some small way help raise the money needed to build a new cigarette factory. But the tobacco companies (to continue with this example) are awash in cash, so my buying their securities in the secondary market will in no practical way help them — while the considerable profit I once made speculating on R.J. Reynolds zero-coupon bonds, bought at a huge discount long after they had been issued, was a dandy source of funds to finance anti-tobacco activities.

What’s more, if you do buy shares in a company doing something you find objectionable, you can vote against management if and when a shareholder resolution is presented to stop it. Not that they ever win, but sometimes management does notice.

So you can see I have been something of a skeptic when it comes to clearly well-intentioned but, in my view, merely “feel good” mutual funds that promise to shun the bad guys. Collectively, they have so little clout as to be infinitesimal.

Now comes Sophia Collier, who, readers of the last couple of days will recall, has already proved me wrong on the issue of money-market funds. I assumed her E*Fund’s unusually high total return — #1 among 287 — had to be the product of taking more risk, but no.

Would she also prove me wrong for ruling out “socially-responsible” mutual funds?

Here the answer is a little less clear. But at the least, my respect this type of fund, and her success in particular, has risen substantially.

Let’s start with the E*Fund, the quasi-checking account money-market fund. Sophia tells me she won’t invest in Treasury securities because she can’t be sure what they’re being used to finance. Her money could go for bombs! Well, that strikes me as pretty silly — except that she winds up getting an even slightly better return for her fund by investing, instead, in government guaranteed Small Business Administration securities. She likes them because they help to finance small community businesses. “Money funds have been criticized for taking money out of local communities,” she says. “Investments such as the SBA guaranteed small business notes we hold in the E*Fund are one way to address this concern.” So why not? If you can get a good return at the same time as you cast your vote, as it were, for the things you believe in — why not?

Twenty-three thousand investors in the seven Portsmouth, New Hampshire-based Citizens Trust funds apparently already like this idea, so who knows — it could catch on and develop at least a little clout along the way.

The six funds besides E*Fund (paraphrasing loosely from their own web site):

The Citizens Emerging Growth Portfolio was the No. 1 overall performing “mid-cap” mutual fund for the year ending August 29, 1996, among 134 mutual funds analyzed by Lipper Analytical Services, Inc., with a one year total return of 30.64%. It’s an aggressive fund that concentrates its $50 million or so in small-and mid-sized U.S. companies.

Citizens Index Portfolio has $153 million in assets and seeks capital appreciation through investment in a market-weighted index of 300 of the country’s top socially responsible companies. What’s interesting is that, at least these days, the socially responsible companies often seem to be the most forward-thinking — e.g., the high-tech companies — and they are among the ones doing best, both in real terms and in the stock market. So at least for now, screening on the basis of social responsibility may not be a handicap at all. It could be a plus.

The “plus” could in some small measure be because good social policy improves morale or attracts more of the best people. (For example, IBM recently extended spousal benefits to same-sex couples. That could encourage a brilliant gay man or lesbian to join or stay with IBM. It would be less likely to cause someone outstanding to quit or fail to apply. So in that sense, IBM improves its position in the competition for talent.) Good social policy could also suggest a wider vision and a greater motivation. Or fewer regulatory actions and liability suits down the road.

Then again, if your competition is packing more chickens into the coop, to their discomfort but your lower costs; or using live bunny rabbits to test something quickly that you test in a more humane, roundabout way; or you subcontract to Chinese prison labor in order to get your costs down — in these and countless other ways, the less “socially responsible” company might be able to bring goods to market faster or cheaper than the competition, and thereby reward its shareholders with higher profits.

So it’s not at all clear that past success achieved by social screening equals future success. But it’s possible. And worst case, with a universe of choices this broad, it’s unlikely you’d be sacrificing much.

So I’ve gone from being a respectful scoffer to being — well, just respectful.

Meanwhile:

The Citizens Income Portfolio is a bond fund focused on current income. It seeks issuers “whose financial strength is improving, so the fund has the potential to gain higher than average return without taking on too much rate or credit risk.”

Citizens Global Equity Portfolio, still tiny with only about $20 million, seeks gains throughout the world (including the U.S.).

Working Assets Money Market Portfolio makes no sense for most individuals, since it lacks the extra juice of the E*Fund. I suppose if you had $100,000 in one of the other funds and wanted to switch temporarily to cash (but exceeded E*Fund’s $15,000 maximum), this would be a convenient place to do it.

Recognizing that most crazy liberals live in California — OK, let’s call a spade a spade: San Francisco — there’s the Muir California Tax-Free Income Portfolio. Can a fund for Greenwich Village and the upper West side of Manhattan be far behind? These funds (and here of course I am decidedly not paraphrasing from the press release) are for socially responsible investors who want to avoid paying taxes, leaving that socially necessary act to others.

And there are other potential ironies. Is a company that produces life-saving drugs, but sells them much cheaper abroad than in the U.S., gouging it’s richer U.S. customers, or practicing a sort of Marxian strategy of “from each [nation] according to its ability [to pay] to each according to its need?” Or what of George Washington’s dictum that “to be prepared for war is one of the most effectual means of preserving peace?” If true, might our top military defense contractors not be the best anti-war bet of all?

In short, finding the moral high ground ain’t always simple. But does that mean there’s no such thing as a good corporate citizen? Or that Sophia is wrong in trying to invest in them?

About 750 of the nearly 2,000 companies Citizens Trust has screened have made it to the “approved” list of investments. “In choosing its investments [reads the press materials], Citizens Trust portfolio managers seek successful companies that are contributing to a better, safer world and creating value for their customers, shareholders and the community. They do this through a series of screens that include environmental concerns, workplace policies and community involvement. In addition, Citizens Trust shuns investments in companies that derive significant revenue from nuclear power, weapons, tobacco or alcohol products or that use animals to test personal care products or otherwise treat animals in a cruel manner.”

Yesterday I described E*Fund, a relatively new quasi-checking account that pays 6% interest, yet charges almost no fees. Write as many checks each month as you want. Use it with CheckFree. No minimum balance.

E*Fund is the brain child of Sophia Collier. Other funds may copy her idea, but so far none has. E*Fund leads the pack. So, is this tall 40-year-old the typical Harvard MBA who cut her teeth at, say, Morgan Stanley?

Actually, she didn’t go to B-school.

Or college.

She was born in Brooklyn. At 19 published her autobiography, Soul Rush. Library Journal described it as a tale of “hop-skipping and ego-tripping through the Seventies,” and Book of the Month picked it up as an alternate. It deals with, among other things, the time she spent living in an ashram. My dictionary defines ashram as “(1) A Hindu hermitage.” (Nah.) “(2) A religious commune.” (Nah.) “(3) A commune of hippies.” (Bingo!)

Anyway, that was the Seventies. In the Eighties, she helped pioneer the all-natural beverage business by founding Soho Natural Soda, which she later sold to Seagram. I don’t know how much she got for it, but when for some reason she was moved to announce her net worth to Katherine Graham, publisher of the Washington Post, Mrs. Graham apparently replied: “How touching, dear.” (Proving yet again that one woman’s windfall is another’s wine-and-cheese budget.)

Part of the windfall went to buying the mutual fund business of Working Assets, which Sophia renamed Citizens Trust and which now has seven different funds and $370 million under management. In the words of the press release, Citizens Trust “is becoming recognized for its socially-responsible investing and product innovation.”

Well, E*Fund is an example of product innovation. But “socially-responsible investing?” Isn’t that just a code-phrase for substandard returns dragged down by an inability to invest in as wide a range of alternatives (like tobacco companies, say) as everybody else?

That’s the question we’ll explore tomorrow.

Well, it’s technically not a checking account, even though it functions like one. It’s a money-market account called E*Fund issued by Citizens Trust, a small mutual fund family. You could read all about it just by clicking, but then I wouldn’t have the fun of telling you myself, so PLEASE DON’T CLICK THIS.

E*Fund is in New Hampshire. To open an account you need $1,000 to start, but after that your balance can be as low as a penny or as high as $15,000 (or your monthly direct-deposited paycheck, if you earn more than $15,000 a month). E*Fund accepts both electronic “direct deposits” and regular old checks that you send in by mail. You start earning interest from the day your checks are received. (There’s a 5-day “escrow” period before you can spend it, to be sure checks clear.)

Apart from a $35 annual fee, and 65 cents each time you get cash from an ATM, the account is free — and pays about 6% interest.

E*Fund was the #1 money market fund for total return out of 287 recently.

“There’s no free lunch,” I told its founder, Sophia Collier. “You must be taking more risk than other money-market funds.”

No, it turns out, she’s not. Indeed, E*Fund sticks to ultra-safe investments. It doesn’t “reach for yield,” as do some of its slightly-more-risky competitors.

Rather, the secret of its higher total return is the free debit card all E*Fund clients get. It works like any other MasterCard debit card — use it to buy anything and the cost is immediately subtracted from your account balance.

But here’s the twist. As you know, when you buy something with plastic, the merchant pays 2% or so to the card company for processing the transaction. (It’s often a little more that 2% with a credit card, usually less than 2% with a debit card.) Well, with E*Fund, 1% of each transaction gets added back into the fund, up to a limit set by law (9.75% of the fund’s gross investment income.) So E*Fund’s award-winning total return is generated not by risk — but by innovation. (And by very low overhead and expense charges.)

Note that you do not have to use the debit card yourself to get this extra return, although it’s encouraged. If no one used it, there would be no extra return.

You get no float or frequent flier miles for using the debit card (which is why I wouldn’t use it if I had an E*Fund account); but neither do you risk racking up 18% interest charges (which is why those of you who run occasional balances on your credit cards should switch to debit cards).

The $15,000 maximum account balance is to keep rich folk from free-riding, as it were, on the debit-card transaction fees generated by ordinary folk paying for their groceries with the debit card.

Interestingly, here’s a case where the little guy can actually do better — earn a higher return — than the big guy. Sophia likes that.

Tomorrow, I’ll tell you more about Sophia’s background and philosophy. You may or may not agree with her politics, but you can’t beat her total return.

Incidentally, as an avid CheckFree user, I was happy to hear that, yes, CheckFree works fine with the E*Fund account. As do the checks you write by hand or print with Quicken or Managing Your Money.

OK, NOW YOU CAN CLICK.

Tomorrow: Who Is This Sophia Collier and How Come WE Didn’t Think of This?

Listen. I know most of you don’t come here for stuff about ostriches or ostrich recipes or (yesterday) their nutritional value, let alone to read about chickens. But this account, which has been making the rounds of the net (my apologies if you’ve seen it), I felt was important to share. Tomorrow I will tell you about a checking account that pays high interest. But today: a chicken account.

My thanks to Feathers, the publication of the California Poultry Industry Federation, from whence this account apparently originated:

“It seems the US Federal Aviation Administration has a unique device for testing the strength of windshields on airplanes. The device is a gun that launches a dead chicken at a plane’s windshield at approximately the speed the plane flies.

“The theory is that if the windshield doesn’t crack from the carcass impact, it’ll survive a real collision with a bird during flight. It seems the British were very interested in this and wanted to test a windshield on a brand new, speedy locomotive they’re developing.

“They borrowed the FAA’s chicken launcher, loaded the chicken and fired. The ballistic chicken shattered the windshield, went through the engineer’s chair, broke an instrument panel and embedded itself in the back wall of the engine cab. The British were stunned and asked the FAA to recheck the test to see if everything was done correctly.

“The FAA reviewed the test thoroughly and had one recommendation: ‘Use a thawed chicken.’”

Tomorrow: A Checking Account that Pays High Interest