Health Savings Accounts & Retirement Savings

An article I recently read about the 401K plans ( The Great Stock Myth ; The Atlantic) concludes that betting only on your 401K saving may not be a good idea as the historic returns are not even close to whatever we all have in our minds. With the kind of fluctuations we observe in the stock market(In other words, zero sum game), what makes the 401K attractive is the tax differed contribution and the employer match. Surprisingly Health Savings Accounts(HSA)s also come with similar features and hence provide a good avenue to park your savings for any future medical expenses.

Health Savings Accounts (HSA) are available since 2003 for the Americans who are holding high deductible health plans and more recently companies are encouraging the employees to sign up for HSA by contributing lump-sum dollars on their behalf. Of course it helps the companies to save on the premium they are paying to insurance companies but I think this plan overall helps in reforming the halthcare system ( Since this was introduced in 2003, the credit probably goes to George Bush but Obama did modify this plan to plug some of the misuses)


HSA is not available to everyone and its contributions are always associated with a high deductible health insurance plan . For example, if your health insurance plan requires you to pay-up the initial family medical expenses up to $2,400 (as of 2010) you are eligible to participate in an HSA. By opening an HSA account, you could transfer up to $6,150 a year tax free for meeting your medical expenses in the future. HSA is offered by most of the banks and are just like a savings/investment account with a debit card and check book. There are a few features I found very attractive as compared to a traditional plan.


1. Premium for your health insurance is lower because of the high deductibles and normally the out of pocket maximums are also lower than a traditional plan. You can use your tax advantaged HSA account to meet the deductibles/Out of the pocket maximum. Normally , employers contribute a percentage of the deductibles so there is always some funds to start with.

2. HSA balances are like a savings account and any unspent money is for you to keep for the future. Since young people tend to incur less of medical expenses, this help them to accumulate whatever unused funds from previous years to the future. Even if you switch to a low deductible plan in the future, you could still use these funds for eligible medical expenses for you or your family.

3. Your contributions are tax differed and based on you income this could be up to 30% return. Most of HSA providers allow you to invest these balances in Mutual Funds and other eligible instruments. So it works just like your 401K. In case you make a withdrawal for non medical expenses, you will have to pay a penalty of 10% and the income tax. Normally such withdrawals are made when you have less or no income so you will end up paying less income tax.

The best part I liked in HSA is that it makes you more responsible in spending on health care. For example, I now want to know how much the doctors are charging me . Some of my colleagues are negotiating better rates with physiotherapists and Chiropractors and the money is going from their savings. And of course I have a peace mind that if the expenses are exceeding the out of pocket maximum, insurance is going to take care of that.

Frankly, most of the working people can meet their expenses for primary care but its hard to be prepared for catastrophic medical situations and HSA seems provide just that.

Confused new home buyers

New home buyers first stumble at the decision point of buy or continue to rent and it invariably ends up in an elaborate spreadsheet exercises to compare the tax benefits, cost of renting, expected appreciation and outside the spreadsheet, the thrill of pursuing the American dream. Once decided, the next grinding stage was looking for a dream home -good neighbourhood, good school districts, commuting distance to workplace and daycare , construction quality and the number of bedrooms and a host of other things. But recently the complexity of this process increased due to recession, changed terms of loans and the new foreclosure and other laws. I think the recent shake-ups in the industry got the new buyers confused to the core.

The recent foreclosure mess is a good example for things that added to such confusion. Its true that most of the banks did not do the due diligence before every foreclosure as their status as a mortgage servicing company did have more benefit in foreclosing a loan rather than modifying it . In other words, Obama administration did know that as a result of the securitization process ( Wall Street taking over the mortgage receivables and selling it to varied investors as a packaged investment ) there was less incentives for the mortgage servicing companies to modify the loans and hence offered a $700 Million package for doing the loan modification. The recent fiasco in foreclosure and the fact that all 50 state attorneys suing the major banks would change this incentive system. Now the foreclosure means more paper work and legal process where the cost of this will outweigh the benefit of the foreclosure in comparison with the loan modification. May be its good for the current mortgage holders and industry in general as every foreclosure adds a home to the already surplus inventory of the homes.

New buyers are puzzled at two things
1. are the prices at bottom? Moody's say its not and people are just waiting for a right time. Also, the income levels did not change in last five years so buyers feel that prices will eventually have to correct to justify the income levels in a no growth economy.
2. Will the rates change? There is a feeling that's the interest rates are probably at the bottom now but the mortgage prices are not.

In addition, there are more foreclosed homes that are added to the supply of homes and there is always a better deal in waiting. May be the new foreclosure messs will help remove that confusion.

Healthcare reform bill

I was following the healthcare bill of Obama close but not that excited about it. There is no doubt that the bill helps increase the number of people who are insured and soft on pre-exiting conditions - a thing that only rich countries could afford and US should provide basic health care for all its citizens as a privilege. Apart from that, there is nothing in the bill that tries to fix the current problem. I am for the government proving health care thought its on network of hospitals to act as a benchmark for private sector and also to provide the Medical education free based on the meritocracy. I think if the government wants to fix the problem the should start with doctors by providing free education and these debt free doctors bring a new perspective to the overall health care system.

Toyota

Think about it. When you press the accelerator, the pad gets stuck. Its definitely scary for a regular driver. I always thought accelerating is a straight forward operation but Toyota story now tells us its not. Rather, its so complicated and has become a threat to Toyota's long enjoyed reputation for quality. Halting the production in the US plants only made the consumers more nervous, though it was the right thing to do.

Though Toyota CEO acknowledged that the company was chasing the numbers and compromised on quality, I feel there was also a 'pull' factor from US consumers. Every other person in the US wanted a Toyota and dealers did not mind stocking Toyotas in large numbers. The only way for Toyota to deliver such large numbers were outsourcing parts from across the world and probably that's where the things started going wrong.

Though Honda stands to gain from this mess, I feel it helps Ford better to emerge as a profitable business in 2010. Also, their product lines are more stylish and better quality. Especially when it comes to trucks and SUVs , Ford has some good products American consumers love to take look at.

Volker Rule

Bad part of Volker rule was that I lost a couple of grants in the unexpected stock market crash. I am not alone, everyone in the lunch table today was whining about bad timing Obama chose for this announcement and how the Volker rule and now doubtful Health reform bill will make him a failure. On a side note, I really wonder the President understands the amount of bad mouthing happens when the stock market goes down a couple of points. This one thing is, probably, the most significant, contributing variable in to his approval rating.

Some channels were showing the way stock market tumbling as Obama started speaking and by the time he was finished, it was well below the day's open levels.This reminds me of an old Saturday Night Live show where Mr. George Bush (Will Ferrel ) says that he decided to speak only in the night because whenever he speaks during the day, the stock market goes in to the crapper. I hope that's not the case with Obama as I have no plan to track his public appearances -:)

Jokes aside, I think the 'Volker rule ' is a formal acknowledgement from the Government that the taxpayers were held hostages during the crisis. If implemented right, these measures could bring the credibility back to the US financial markets(of course with a bad hit on their bottomlines). Its not just Paul Volcker, otherwise moderate Geithner also agrees that such regulations are required to minimise the future risks. Volcker Rule was announced just after the "Financial Crisis Responsibility Fee" and I guess that's what pissed the markets off. We will have to wait and see what's the real impact of Volcker Rule on the financial institutions and how diluted it would be when it comes for implementation. I still want to believe that Obama team wants to implement some sensible policies to avoid the future troubles and if it was just for a political mileage, they were better off without this announcement.

Stock Market Gambling in 2009-My investment rules

This is my 2009 roundup for my stock portfolio. I made an 80% annualized return on my portfolio and in this post I plan to track what I did for the future references and updates.

In my opinion, Stock market ‘kicks’ you almost the same way tables games do in casinos. I always thought I had a better chance to win if I had lots of money to bet on a roulette table ( yes, I am talking about those people who stack-up the chips all over the table and win 36 times back on some) Strange, but I thought the same about Warren Buffett .

So to gamble, I started my stock portfolio in 2009. Thanks to the academic training, the financial numbers and data don’t make me dizzy. (I should also mention that my master’s thesis was to model Stock market behavior). I risked $ 2,000 when I started this portfolio in early Jan 09 and the idea was to learn to play the game in the US market. My first pick was Ford as I liked their new products line and the CEO. My second pick was Citibank as I thought at $5 Citi was grossly undervalued. Also, these stocks were really cheap and entry was easier with a 2K portfolio. I sold Citi at a 21% loss a month after and four months later sold Ford for a 132% gain.

My first two trades used only 60% of the 2K I had and they generated a profit of $ 821 and that was a 41% return- close enough to a roulette side bet. I have noticed one thing; CEOs make a difference. Obviously that was not a new learning but I developed an investment rule for later use. Read the CEO profile in Wiki or online and if the products don’t impress you, at least CEOs should.

I stayed low during the March/April market meltdown and saved up money for a comeback in July. I increased my cash stake to 6.5K in July and bought beaten down financial select sector ETF (XLF), Citibank, Discover Financial and CIT. Financial sector was really fragile hence generated a lot more fluctuation than the overall market. This was also an opportunity to make money and I thought I had some advantage as I understood the finance business better. The investments paid off and by Aug I had a cash return of 3.1K i.e. a 48% return on the 6.5K investment. I was more convinced with the strategy of investing in the businesses you understand better. One of my investments, CIT was deliberate as they had become penny stock fearing bankruptcy and I thought the government would rescue them with another bailout. However, bailout did not happen but the bondholders provided a lifeline to CIT and bailed me out in the process.

During these seven months, I learned how and where to look for information. I also got some idea how news translates in to price movements on specific stocks. Unless you have your own money, you never pay attention to such details. With all the encouragement I had from the trading returns, I increased my investment to 25K by September. As of end of December, I did 27 buy transactions and generated 7.3K profit or 30% return on 25K. Since I did not have 25K in the beginning of the year, annualized return on my investment stands at 80%. Please take a look at attached trading log to see my winners and mistakes.

Many of us know gambling games are designed to benefit the house in the long-term and it might be a Monte Carlo or since we are talking about stock market, it might be Goldman Sachs. Again in my opinion, gone are the days where stock market was a place for long term returns but focusing just on short term, we could make some money or at least have some fun of trading.

These are some rules I developed in the first year of my US stock market investments.
1. Do at least 1 buy and 1 sell transaction in 2 weeks and keep at least 50% of the funds invested. Opportunity to make higher profit increases with the number of trades.

2. Never invest more than 60% funds. This means you have 40% of your portfolio as cash. When the price of the share you bought unexpectedly goes down and you have reasons to believe that it’s going to recover, try to average the price using the cash in hand. (Wells Fargo, Dell & Citi in my portfolio).

3. Sell whenever the net return on a trade crosses 2%. Never hold beyond 5%. ( Nomura, Citi, Ford)

4. Watch the panic sales and price drop due to unexpected news or expected stock dilution or similar. Jump in when they start recovering. Companies with good fundamentals are the best bet (Nomura, Dell, Autodesk are some examples in my portfolio).

5. Sell when prices continue to go down and there is no reason for you to justify a wait. In other words, don’t think every stock recovers in the long-term. By waiting, you are just blocking the cash (Lloyd, Citibank in my portfolio)

6. Invest in the businesses you understand – Old Warren Buffet saying but this also means that you should learn about a business before you invest in it. Many a times, knowing the business helped me to discard the Wall Street analyst’s number games. (Nomura for example )

7. Read about CEOs; watch they talk.

Overall, my favorites are beaten down stocks because bulls pick them to ride on. New product launch or a better sales quarter can cause these companies prices go up. Also, remember to get rid of them the moment they cross 2% return mark as such bull runs are usually short-lived.

I do not diversify the stock holdings as I believe it does not let me maximize my returns. Also I am against holding more than 3 companies at a time as that would demand a lot of time in research and tracking. I also invest in the same companies over and over again as I already know the price support and resistance levels. Finally, I use fundamentals to make sure they don’t become penny stocks in next couple of years.


Day trading is not possible for people like me who work 8 hours a day and no access to online trading at work. I see there is lot of leverage you could do by margin trading or increasing the frequency of trades but my investment objective was to make a 10-15% on my cash savings. And all I have is lunchtime and an iPhone so average holding period for a stock was 3 weeks.


Talking about liveraging, I also have a small options trading portfolio. I will have those results published soon.

Here is the trading book to see the buy and sell trades.

Healthcare reforms -never ending discussions

I am juggling my thoughts around the healthcare reform proposal of Obama administration and the discussions it generated so far.




I doubt backing out on a Government run insurance plan was a compromise by Obama administration. There are several programs like Medicare, Medicaid, Children’s health insurance and Emergency Medical care that morphs into a some form of insurance. All these programs were opposed as ‘socialistic’ at the time of their introduction and were never endorsed by the so called ‘conservatives’. May be the new plan could have streamlined it, at the best.



I feel insurance companies are not to blame for this mess. Just like any others, they provide a valuable service and make a profit out of it. There are several players in this market to ensure that competitive prices are available to the insurance shoppers.



In a marketplace, consumers demand value for their money. If that holds true for healthcare, they should check the doctor’s fee, cost of the procedures and services and compare it with the quality before availing the services. This means if someone is paying higher cost for their healthcare, it’s because he/she enjoys a superior service. I don’t think the present system encourage the insured customers to do this evaluation. Cost of many of the procedures I looked at is shockingly high and probably well justifies the cost of insurance.



Billing fraud and excessive billing by healthcare providers also pushed the average cost of insurance high. Physicians are often encouraged to perform multiple procedures allowed under the insurance plan because they want to be protected from any legal suits in the future and also they earn for their employers.



I have some proposals !

• Subsidize the medical education; let’s not pressurize them into making money to pay off the half a million debt. I think its worth spending for the best of our talent which government could tap into later.


• Protect physicians from unnecessary law suits. In other words, if the physicians win the case, the one who sued them pay the cost. This should discourage 90% of the fake litigations. Also this will reduce malpractice insurance cost and combined with earlier point, may reduce the consultation fee they are charging.


• Make people more responsible: Individuals pay for the normal consultations, fitness checks and simple procedures. That way, they will be encouraged to shop for the best value service in their area.Insurance coverage should be a protection for expensive procedures or hospitalization. A range of policy packages should ensure that everybody is covered to the degree of what they are paying for.


• Government should set-up a chain of hospitals that are competitive with private run hospitals in terms of facilities. This will help in setting a standard for the cost of diagnostic procedures and other services. Also the government could administer all their current programs through these outlets.

I am sure almost all of these thoughts are debatable; but I just want to put my version down. Penny for your thoughts !