This post is part of the latest Carnival of Personal Finance. Be sure to check out the other great entries as well.

Tough economic times, coupled with soaring gold prices, has led to a growing number of ways to sell gold.  Two particularly terrible ways to sell both share a common trait: convenience and a lack of comparison pricing.

The first, is online gold buyers like Cash4Gold.com, which had

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Bernie Madoff’s guilty plea today makes him the latest confirmed proprietor of a ponzi scheme, adding him to the long list dating back to the original namesake Charles Ponzi.  Charles himself wasn’t the first to use the technique, but his was the first large scale use in the US and so his name is infamously linked to the scheme.  So what exactly is a ponzi scheme and how do they work?

A ponzi scheme pays returns to investors either from their own money or the money of other investors rather than from profitable investments.  High returns in the scheme typically make early investors more likely to reinvest their returns and also attracts new investors.  As the scheme grows it becomes more and more difficult to maintain, since an increasing number of new investments or reinvestments are required to keep it afloat.  This is similar to a pyramid scheme except that ponzi schemes tend to have a flat hierarchy where the fraudster deals directly with victims and is the only one to profit.

Most ponzi schemes have at their core a seemingly plausible business or investment idea.  Investors are

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The market rally that began today after Citibank announced that it was once again profitable saw further gains after Rep. Barney Frank said he expects the uptick rule to be restored within one months time.  The uptick rule, which was instated in 1938 to regulate short selling of stocks, was eliminated in July of 2007.  To understand the uptick rule and its potential effects consider the definition and the following uptick rule example.

The uptick rule simply states that a stock cannot be sold short unless the sale price is above the last sold price.  The previous sale price can be matched if it was higher than the preceding sale price.  As a reminder, selling short is the practice of selling stock that you don’t own in the hopes of buying it back (covering your short) at a lower price later.  So if you thought a stock was going down, you could sell it short and still make a profit.  When a stock is declining, short sellers can push prices even lower in much the same way a rush a buy orders can send a rising stock soaring.

With the uptick rule in place, the downward pressure from short selling is supposed to be moderated.  As sellers outnumber buyers, the price of a stock would tend to fall.  Adding short sellers to the mix increases the shares available for sale, driving successive sale prices lower and lower.  With the uptick rule in place, the short sellers could not sell unless they could get a higher price than the last sale price.  So if a stock last traded at

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I’ve been feeling so at odds with most of the recent coverage of the stock market but was having trouble clarifying my sentiment.  Associated Press writer Rachel Beck finally helped to put some of my thoughts into words when she asked Are stocks facing ‘Irrational Pessimism?’.

To me, that’s an excellent way to describe the current situation. Why is it that so many of us continue to repeat the mistakes of the past? The market is in dismal shape, but isn’t that exactly what we should be hoping for as investors?  Lower prices now means that our gains will be even greater when the recovery eventually comes.  I’m not asserting that we’ve reached a market bottom or that things won’t get a lot worse before they get better.  But I do feel strongly that we’ll look back on current prices and kick ourselves for not buying even more.  That’s why I’m continuing to invest as much as possible.  I said as much when Mrs Micah asked her readers How the Recession Had Changed Their Spending Habits.

Unfortunately, many investors are taking a different approach.  I’ve been reading about people who have recently shifted to gold or cash to ride out the storm.  The trouble with such an approach is that it assumes you’ll be able to get back in just as things start to improve.  Few, if any, average investors can repeatedly time the market successfully.  More likely, they’ll get back in after clear signs of improvement are visible.  By that time, many of the gains will already have been made and the process of buying high and selling low will have begun again.  No, if you want to take full advantage of a recovery, investments must be made before signs of improvement.  A quick test of whether you’ll be able to get back in at the right time is to ask yourself this: “Did you get out of the market at the right time?”  If you answered yes, then you’ve probably been in cash for a long time and likely already started to buy again.  If you answered no, you probably sold more recently and are going to join the recovery too late as well.  Instead of chasing performance by watching lagging indicators, consider positioning yourself ahead of the curve for a change.  For me, that means investing more and more as the market remains where it it or declines further.

2008 will certainly be a memorable year for the stock market.  Aside from the scandals and bailouts, bankruptcies and failures, average return is on pace to be one of the lowest in history.  This last fact means that many portfolios have declined significantly in value.  As a result, many people have unrealized losses sitting on the books.  Selling some positions to realize a loss could have favorable tax consequences while maintaining most of the upside potential for future gains.

In general, capital losses up to $3000 can be used to offset income each year.  Losses greater than $3000 can be carried over to future years.    Selling enough stock to book a $3000 loss will maximize the amount of income that can be offset this year.  The wash sale rule precludes this loss from applying if the same (of substantially similar) security is bought within 30 days to replace the one you sold.  To maintain upside potential you can either

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Paying $1.84 for gas today reminded me that I wanted to revisit my analysis of Chrysler’s Let’s Refuel America Program and MyGallons.com.

Back in May, I discussed why Chrysler’s program was such a bad deal.  As a reminder, the program allowed participants to lock in the ultra low price of $2.99 per gallon for three years.  The main reason it was a bad deal was that you had to forgo other dealer incentives to participate, meaning that you might have to give up guaranteed savings to get potential savings.   I wonder how people who participated in the program feel about it now?  Sure, gas may rise above $2.99 before their deal runs out, but I doubt they’re happy with their decision.

Those who wanted to prepay for gasoline for future use without having to buy an overpriced car may have opted to use MyGallons.com.  Those people are likely kicking themselves as well.  Anyone thinking about joining that site (which lets you prepay for Gas, with some restrictions) today, should ask themselves why

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In part 1 of this topic, I discussed different ways to apply historical default rates to small value P2P loan portfolios.  To make more sense out of how historical default rates might affect loan performance, I ran a monte carlo analysis on a select set of hypothetical loans.   Here are the simulation results.

To get a better handle on the effect of historical default rates on P2P loan portfolios, I performed a monte carlo simulation on portfolios lending $100, $500, $1000, $2000, and $5000.  Since I assumed that the money was spread across investments of $25 each, those dollar amounts correlate to 4, 20, 40, 80, and 200 loans respectively.  For each test case, I simulated investing in all A1, C1, E1, or G1 loans (using Lending Club grading terminology) as well as an equal mix of those 4 grades, which I called Div for diversified.  I used the following historical yearly default and corresponding loan interest rates (again from Lending Club’s site):

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Rethinking Historical Default Rates When Applied to Small Value P2P Loan Portfolios

Historical default rates can be difficult to apply to small value P2P loan portfolios.  The first thing to remember is that, much like stock market returns, historical default rates do not necessarily predict future default rates.  The next major problem with analyzing risk in small P2P loan portfolios is that a small number of loans does not meet the threshold for statistical significance.  In other words, if you have one loan with a historical default rate of 5%, you can’t directly apply that rate to your loan.  A 5% historical default rate might lead you to expect 5 out of 100 such loans to default, but what whole number is 5% of 1?  If you estimate high, 5% of 1 is 1 meaning that your loan will be expected to default.  If you estimate low, 5% of 1 is 0 meaning that your loan will not be expected to default.  Realistically, a 5% historical default rate means that you might expect

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Contrary to popular belief, the stock market is not closed for Columbus Day.  Here are the NYSE holidays for 2008-2009:

2008
Thanksgiving Day, November 27
Christmas, December 25

2009
New Year’s Day, January 1
Martin Luther King, Jr. Day, January 19
Presidents’ Day, February 16
Good Friday, April 10
Memorial Day, May 25
Independence Day, July 3 (observed)
Labor Day, September 7
Thanksgiving Day, November 26
Christmas, December 25

This post is part of my Freaky Financial Fridays series, where I argue a case from an opposing view, generally in contradiction to my own philosophy or conventional financial advice.

Interest only mortgages are often associated with the sub-prime meltdown and generally dismissed by responsible financial advisers.  While interest only loans are often poor vehicles for potential homeowners, there is one type of buyer who could stand to gain from their use.

Interest only mortgages are just that, only the interest portion of the loan is paid each month.  At the end of the term you’d owe just as much as when you started because no principal payments had been applied.  Unless the house appreciated, which is of course possible but less likely in today’s market, you would have zero equity in the home.  The one upside to that huge downside is that your monthly payment will be lower.  This fact has caused

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