Economics from a people first point-of-view

Once upon a time long ago in a land faraway, there was a community of successful business people who wanted more books to read. They decided to pool their resources and create a brand new library.

These people founded a beautiful new library building in the center of their city. They sought the best librarian in the land, so they offered the extra incentive of fees. In addition to a salary and bonuses, their librarian could earn fees for services. They instructed their librarian to uphold two of Mr. S.R. Ranganathan’s “five laws of library science”:

A book for every reader.
A reader for every book.

Our industrious librarian immediately began making deals with both book publishers and library patrons, charging each side a fee. These deals were all based on the value of books. So these kinds of deals quickly become labeled “book derivatives,” or “BODs” for short.
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(part 1 of 3)

In my post, Fees in a Mutual Fund Prospectus: Three Ways A Prospectus Deceives, part 3,  we looked at how mutual fund fees can accumulate and take more than half of the total return on your investments. Over the past seventeen years many people realized this loss on mutual funds was happening. They’ve switched to investing in exchange traded fund (ETFs) instead.

Investors have caused the number of exchange traded funds to nearly double over the past few years.  Should you think about joining them? Well, yes, consider ETFs, but be aware of how complex these derivative products are.

Derivative products have no value of their own. Their value is based on other kinds of investments. Exchange traded funds are based on the value of a “basket” of stocks that are owned by an entity called a “market maker.” You buy rights to part of this virtual basket when you buy an ETF.

In this post we’ll see what an ETF is. In part two of this series on ETFs we’ll look at pros and cons of buying an ETF. In part three we’ll learn about market makers of ETFs and what risks are entailed in buying ETF products from them. Continue reading →

Along with investment banks, large insurance companies are major providers of 401k and 403b funds for employee retirement plans. Perhaps you have a plan with one of them.

A few years ago, I discovered a shocking secret about the mutual funds offered in insurers’ retirement plans. They are not mutual funds at all. They are proprietary derivatives based on mutual funds. I learned I’d been investing in derivatives!

401k and 403b derivatives: how I discovered I owned them

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