Good Time To Check Your Risk Tolerance Again?

I should really stop looking at and, but nobody will stop talking about it so here I am talking about it too. Moo. 🙂 If you watch your portfolio closely and are feeling nervous and/or scared, then perhaps this is a good time to self-reflect and ask yourself if you are as risk tolerant as you thought you were.

Many financial experts like to give out a simple “risk questionnaire” to figure out your risk tolerance, and then guide you into an asset allocation afterwards. The problem is, it is really easy for people to say “I’m not scared!” and then tell themselves they don’t need to save as much. The more you save, the less risk you need to take. Back when stocks were booming, so many folks had 100% in stocks, and even some retirees had 60-70% in stocks.

Back in 2006, I tried out a bunch of these risk surveys and remarked that

I think it’s really hard for people to gauge how they would react to losing 30% of their assets in a year unless they had actually experienced it.

I still don’t think we have experienced true fear yet, but maybe now is a better time to take the survey questions again? These samples are taken from the ShareBuilder website’s PortfolioBuilder application.

Sample Question 1

Well, the year-to-date total return of the S&P 500 is only about -12% as of the end of today. It was about -15% yesterday.

Sample Question 2

The recent bouncing around puts this question in a new light, eh?

Sample Question 3

Even now, we are nowhere near dropping 25% in 3 months. Are you sure what you would do?

Another Free Schick Razor Sample (Men’s)

About as straightforward as it gets:

Thanks YP, I missed this one.

Free Schick Intuition Razor Giveaway

Here is another offer for a free Schick Intuition Plus razor (now expired), targeted at the ladies (though I don’t see why a guy can’t use it). First 70,000, so enter today. Via SD. We’ve gotten one of these free before, and Mrs. MMB reports that this is a very nice razor. 🙂

Enter the Countdown to Wedding Bliss Giveaway, brought to you by iVillage and Schick® Intuition®, and get on the road to your happily-ever-after. Be among the first 70,000 iVillage members to respond and you can get a *FREE Schick® Intuition Plus® razor. Make it a beautiful beginning–enter today!

NO PURCHASE NECESSARY. Void where prohibited. Open only to legal U.S. residents who are 18 or older. Limit one Schick razor per person, per household of the physical address above. Offer expires 12/31/2008 or while supplies last.

I just got another two free razors in the mail within the last week, so many of them definitely do come through.

When Markets Collide: Book Review, Model Asset Allocation

The last book I reviewed was Financial Armageddon. Then I saw the title of this book: When Markets Collide. I almost stopped right there, as I was not at all in the mood for yet more doomsday talk.

However, I saw that the author, Mohamed El-Erian, ran the Harvard University Endowment for nearly two years, and is now the co-CEO of the huge bond investment company PIMCO. Throw in the fact that the tagline of this book is “Investment Strategies for the Age of Global Economic Change”, and perhaps this would be an insightful book about investing like David Swensen’s Unconventional Success. (Swensen ran the Yale University Endowment.)

Ease of Reading / Target Audience
The first I noticed about this book was that it was very difficult to read. The author tried to write this book for both experienced economic policymakers and the average investor. Not an easy feat. I felt that he came off as one of those guys who is just “too smart” and can’t simplify things for the rest of us. Here is an example of this high-level writing from the book:

The challenge of how to deal with consequential and volatile endogenous liquidity relates to another policy issue that I will discuss in Chapter 7: how to refine the traditional instruments of monetary control and ensure more meaningful and sophisticated supervision on a range of activities, with volatile leverage, that have been enabled by the ongoing structural transformations and yet are outside meaningful oversight.

Quick Summary: My Interpretation
The relationships between the economies of the world are changing. Emerging markets, which used to either be debtor nations or those who would only buy the safest thing available (US Treasuries), are growing fast and will start to invest their considerable wealth elsewhere, including equities. The U.S. can’t rely on other countries to buy our debt forever, just as the other countries can’t rely on U.S. consumers to prop up the world’s economy. This is where the “markets collide”. Throw in complicated structured investments like derivatives which nobody perfectly understands, and we are only in the beginning of a very bumpy road ahead.

Model Asset Allocation
So what is a U.S.-based individual investor to do? El-Erian states the three basic steps of portfolio management are: “choosing the right asset allocation, finding the best implementation vehicles, and conducting risk management.” Accordingly, here is his model asset allocation, with midrange percentages.

Equities (49% total)
15% United States
15% Other advanced economies
12% Emerging economies
7% Private

Bonds (14% total)
5% U.S.
9% International

Real Assets (27% total)
6% Real estate
11% Commodities
5% Inflation protected bonds
5% Infrastructure

Special Opportunities

This adds up to 98%, but the way I read the book, the rest should be in cash. As a comparison, here is the asset allocation from Unconventional Success.

El-Erian doesn’t like home-bias and is believes strongly in being “globally-diversified”. You can see that only about 1/3rd of the equity allocation is to U.S. stocks. If an investor does have access to private equity, then you can redistribute that back into the other equities. In my opinion, he cops out in the active manager vs. passive index debate. He simply states that it’s really hard to find a good active manager, but if you can you should go with them. Of course, no further hints are given. 😛

As for bonds, he believes that bonds are overall a good portfolio diversifier to manage volatility. He also advocates a big portion of international bonds, which he believes are mature enough to be considered right beside domestic bonds. (He was also was an emerging bonds analyst for many years.)

Inflation is another big concern due to huge global growth, and thus there is a sizable allocation to real assets – commodities, real estate, inflation-protected bonds, and infrastructure (publicly traded equity and debt securities of utilities, airports, ports, roads, hospitals, etc.). Special Opportunities could mean speculative plays such as distressed debt or long-term environmental gambles like carbon credits.

In general, this is pretty different mix from many other model asset allocations I’ve read about.

When Markets Collide is mainly a macro-economics book as opposed to a how-to-invest book, but it does give some interesting insights about the future that might influence my personal investing strategies. For example, I agree that activities from non-U.S. countries will be increasingly important and their equities should be a significant part of one’s portfolio. I am not so sure (or educated) about the rest. I could only give a very superficial review here, so if this perspective sounds interesting and you want more details than I have given, I would read the book. If futuristic projections aren’t your thing, then I’d probably skip it.

Where Does Money Really Come From?

Given current events, it might be good idea for the average citizen to better understand our modern banking system. Reader Rick submitted this following video by Paul Grignon which tries to explains things in an accessible way using animation. It is about 45 minutes long, so you need to commit a chunk of time to watch it, but I thought it was worth it.

The first part explains our fractional-reserve banking system very well. One might think that for every $1 we put in a bank account, that is $1 that can be lent as a mortgage loan. In actuality, it is more like $100 that can be lent. (Wonder why banks want our money so bad?) So where is most of the world’s money coming from? In effect, it is created by the act of borrowing itself. Money is created by debt!

However, in the end, it draws some controversial conclusions. The creator contends that this system is unsustainable, and because banks control the credit in our society, they effectively control the society. Thus, it would be better if the government took over such transactions. I have been unable to find a good rebuttal by a financial professional or economist online, so please drop a comment if you have.

(Best viewed in full-screen mode. Takes a while to start.)

WaMu Fails, Bought By JP Morgan Chase: What Happens To My Money?

Washington Mutual was taken over by the FDIC today (Thursday). But for most account holders, there is no reason to panic.

All deposits, even those over $100,000 FDIC limits, will be taken over by JPM Chase, and are still safe. From the WSJ:

While the exact structure of the transaction wasn’t immediately known, J.P. Morgan is expected to acquire Washington Mutual’s deposits and branches, as well as other operations. The deal isn’t expected to result in any hit to the Federal Deposit Insurance Corp.’s bank-insurance fund, according to a person familiar with the arrangement. […]

Under the deal, New York-based J.P. Morgan, which has long coveted WaMu as a way to secure a footprint on the West Coast, will assume most of the thrift’s deposits and branches, as well as some other operations.

There will be no interruption in services. Bill payments will go through, checks will clear, direct deposits will arrive, your account number stays the same, the website still works, branches will still open on Friday. From CNN:

“For bank customers, it will be a seamless transition,” said FDIC Chairman Sheila Bair. “There will be no interruption in services and bank customers should expect business as usual come Friday morning,”

Shareholders get nothing. Well, not like they had much hope anyways with the stock at less than $2 per share. I hope this is another wake up call for those that still think it’s a good idea to keep a large portion of their portfolio in their company’s stock. I don’t care if you work for GM, IBM, or Microsoft. Shares of any single company always have some risk of becoming worthless.

More details to come…
They haven’t released the official press release yet. It will be interesting to see how the interest rates will change, and if they will choose to honor outstanding CDs. Chase Bank doesn’t have the same products as WaMu did, but IndyMac still honored their existing CDs. Maybe it’s time to apply for one now? WaMu is still advertising everything like their 4% APY savings as before on their website.

Anyways, don’t panic, okay? My local branch is crowded enough as it is. I don’t need a line around the block of nervous people clamoring for their money in small bills. 😉

Update: Here is a preliminary welcome page from Chase. Nothing too much new there, no mention of interest rates changing. Still offering the same 4% APY savings and 5% CDs on the website.

Update 2: Here is the official page from FDIC.

Will I continue to earn interest at the same rate?
All interest on deposits accrued through September 25, 2008, will be paid at your same rate. JPMorgan Chase Bank will be reviewing rates and will provide further information soon.

Update 3: They updated and changed the FDIC page!. It now states:

Will I continue to earn interest at the same rate?
JPMorgan Chase accepted Washington Mutual’s interest bearing accounts including CD’s at the contract rate; therefore, they are not waiving early withdrawal penalties.

Accordingly, the 5% APY CDs should stay valid.

Zecco Gives Unlimited Free Stock and Options Trades in October

Apparently, a start-up brokerage where I keep most of my “play money”, didn’t do so well during the last week. People report having problems logging into their accounts due to all the market turbulence. I was luckily not affected, as I haven’t had time to trade much at all.

In response, they are offering unlimited free trades (both stock and options) for the entire month of October to all customers and all accounts. Also, the $2,500 minimum for free trades is being waived. From a recent announcement:

To show our appreciation for your loyalty, we have decided to make October a 100% unlimited free trading month. This means that between October 1st and October 31st you can make unlimited equity and options trades commission-free. As far as I know, this has never been done in the history of the brokerage industry, until now. But then again, we are seeing things in the market we never would have believed, until now.


* The no-commission stock and options trade offer applies to all Zecco Trading accounts in good standing.
* The offer applies to equity and options trades, including multi-legged options orders and all options contracts.
* Mutual fund trades are not eligible for the offer.
* There is no minimum equity balance requirement or minimum trade volume restriction.
* All account types are eligible, including IRA.
* The offer is effective for equity and option trades placed and executed 10/1/08 through 10/31/08. The standard free trading program and options pricing will resume 11/1/08.

What are some good ways to take advantage of this offer? Maybe time to do some tax-loss harvesting? I suppose active traders and daytraders should be happy and go nuts. 🙂 Since their normal offer is to give you 10 free trades per month, I usually consider Zecco best for buy-and-hold investors to buy shares of ETFs regularly and cheaply. Now I guess you could dollar-cost-average every day.

The free options trading do sound interesting, as they used to cost $4.50 + $.50/contract. You never see free options trading. Maybe it’s time to try some test trades out? It would be interesting to learn to create proper hedges.

As an aside, I recently moved all of my cash out of my Zecco account since I wasn’t trading (no free time) and wanted to earn more interest elsewhere. However, they then de-activated my account. It wasn’t closed permanently and a phone call got it open again, but just an FYI if you experience weird things. You can read about my previous experiences with Zecco here.

Bank Bonuses: Citibank, Bank of West, Provident Bank

You get a $100 bonus when you open an eligible Citi checking account with $1,000 and complete one direct deposit or repeated billpay usage. New customers only. Seems also to be for Citi credit card holders only.

Within the first month after account opening, customer must complete at least one direct deposit to, or at least two electronic bill payments from, the checking account each month for three consecutive months to get $100.

Bank of the West
This regional bank (west/midwest US) is offering a $100 bonus for doing a variety of activities: $25 for opening the account with a debit card, $25 for using it 10 times, $25 for direct deposit, and $25 for billpay. Must be opened in a physical branch.

Offer valid for a new personal checking account opened from September 8 through November 1, 2008 with $100 or more from a financial institution other than Bank of the West.

Provident Bank
Another regional bank (east/northeast US) offering a $100 bonus for opening a checking account with $25 minimum.

Provident Bank will award $100 to new personal checking customers that open a new Totally Free, Regular, Interest or Platinum checking account between 9/2/08 and 11/21/08 that have direct deposit and a Provident MasterMoney™ debit card by 12/31/08.

Wells Fargo
You get a $50 bonus when you open a Wells Fargo Free Checking Account with $100. No minimum balance, no monthly fees.

Limit one $50 bonus per household. To qualify for your $50 bonus, you must open and fund a new personal Wells Fargo checking account with a minimum initial deposit of $100 (not including the $50 bonus) by October 17, 2008.

WaMu Raises Savings Rate to 4.00% APY

Washington Mutual has raised the rate on their Online Savings + Free Checking combo to 4.0% APY. This is now the highest of the no-minimum no-fee savings accounts. Curiously, HSBC Direct actually dropped their rate to 3.25% APY earlier this week.

You can learn more about this account at my WaMu review post. They also again have 12-month CDs yielding 5% APY.

I’ve already laid out why I am sticking with Washington Mutual. In short, why would I mess with this nice setup as long as my money is still insured?

[Some pages still say 3.75%, but my account details confirm the 4.0% APY. Existing account holders can log in and click on “About this account”. Or just click here and hit Apply Today, and you should see the new rate.]

How We Tried To Save Money On A Trip To Spain

The tickets are booked and hotel reservations are made for our trip to Spain. Of course, all this economic turmoil makes me a bit nervous, but the fact that we finally finished saving up for our 6-month Emergency Fund makes me much more comfortable. Not that we feel our jobs are in trouble, but you never know.

We did try several things to minimize costs for our 7-night stay in Spain:

Airfare: Save 50% By Combining Trips
We already committed going to a friend’s wedding on the East Coast, and so as is our habit we looked to see we could “add on” a trip somewhere interesting in that direction. For example, the ticket from West Coast to East Coast was around $350, while tacking on the trip to Spain made the flight cost $750. Effectively, we only had to pay $400 each to fly to Spain – not a bad deal! (Other European countries were $200-$400 more for some reason.)

In addition, we managed to book an open-jaw trip into Madrid and out of Barcelona for the same price. This allows us to spend more time in both cities, and we don’t have to pay to travel back to Madrid for the return flight.

We still have to decide whether to take train or plane from Madrid to Barcelona. The train is more expensive, but might be more fun? Airplane looks to be both slightly faster and cheaper, though.

The Westin Hotel Madrid

Hotels: Cashing in Rewards Points
A hostel in Madrid would starts at about $25 per bed per night, for a total of $50 per couple. But after getting married, I had to put the hosteling days behind me. 🙂 It’s okay, I get a better night’s sleep in a hotel. A basic hotel in a decent location with a double/queen bed starts at around €80 = $120 per night. It goes up really quickly from there.

However, I have collected a fair number of the ever-useful Starpoints, mostly from my Starwood Preferred Guest Credit Card from American Express, so I decided to look at what was available. I found the Westin Palace Hotel, first built in 1912 by King Alfonso XIII as a place for his wedding guests to stay (naturally). Rated Spain’s #1 Hotel by Condé Naste magazine, it runs €305 = $450 per night!

However, I could book a room for only 12,000 Starpoints. On top of that, if I booked 4 nights, I got the 5th free. So now I had 5 nights for only 48,000 points total. At the $450 rate, that made each Starpoint worth 4.7 cents. Put another way, my Starwood card was earning me 4.7% cash back. Even at the budget hotel rate of $120 a night, I still was getting 1.25%. Except now I’m sleeping on a Heavenly Bed and staying in a palace!

Barcelona was even more expensive, but we found a simple hotel for €85 = $125 per night.

We both hate guided tours, so we usually just plan things out by ourselves with guidebooks and the internet. We like Rick Steves, Rough Guides, and Lonely Planet the best. We usually buy one guidebook that we can highlight and mark up, and also bring along three other ones + a language phrasebook from the library. Of course, we risk losing the books in which case we’d have to replace them, but I think it is worthwhile. This time around, I even checked out some Spanish language CDs. Dos cerveza por fa vor!

Churros image

Standard procedure is to try and find a grocery store, and stock up on water and local snacks. A few picnics for lunch with regional junk food is always fun and tasty. Ethnic foods can also be a great value. The best tasting falafel I have ever eaten was in Paris and cost €5.

Of course, I don’t want to skimp to much on food. I will be looking forward to consuming large amounts of tapas and house wine at every hole-in-the-wall I can find. I can’t wait to try chocolate con churros! If I generously estimate about $40 a day per person for food, and given that we would pay about $10 a day for food at home, that’s an added cost of about $30 per day.

We briefly considering eating at El Bulli with Ferran Adria, but it only opens from April to September each year. Besides, I don’t think I’d be willing to drop $400 on a single meal, even if it was voted the best restaurant in the world.

Adding this all up – airfare, hotel, and food should cost an estimated $400 + $125 + $210 = $735 per person. Add in remaining transportation and sightseeing, and I think we will still come in under $900 easily. A lot of money still, but hopefully resulting in some lasting memories.

Travel and Money: Best Way To Get Cash, Best Credit Cards, and Safety Concerns

I wouldn’t say my wife and I are well-traveled, but we do try and experience other cultures whenever we can. Given work constraints and Corporate America’s hatred of vacations (2 weeks a year??), we are lucky if we can manage one trip per year. However, I think we’ve worked out a pretty good system of managing money needs while abroad.

Travelers Checks?
I never buy travelers checks. You often have to pay a fee when you buy them, and then you might have to pay a fee for exchanging them to local currency. Or you’re searching all day for the American Express office. Less and less stores accept them for purchases, due to fraud and theft. If your signatures don’t exactly match, they give you grief. If you get them wet, they are useless and you have to replace them.

Most importantly: Any place that does take them will most likely accept credit cards, which are a better alternative (see below).

Best Credit Card For International Travel
Whenever possible, I use a credit card for making purchases while abroad. Hotels, transportation, sightseeing tickets, and so on. However, most credit cards are pretty expensive when it comes to foreign currency purchases. Visa and Mastercard charge a standard 1% “conversion” fee on top of the wholesale “interbank” exchange rate. Many major credit card issuers like Citi, Chase, and American Express charge you another 2%-3% on top of that. You’re losing up to 4% off the bat.

So what do I use? My favorite card, hands down, is my credit card from Capital One . I have used this card from China to France with no issues at all. Capital One charges you only the interbank currency exchange rate. They pay the Visa/Mastercard 1% fee for you, and they don’t have any self-imposed surcharge. Finally, this specific card gives you 1% cash back on all purchases (2% for groceries/gas) and has no annual fee.

Net result: Not only do I get the best exchange rate possible, but I actually gain 1% cash back on my foreign purchases. It’s better than cash!

(I only use this card internationally. While in the US, I prefer these cash back credit cards.)

ATM Cards / Getting Cash
I used to worry about bringing some local currency with me, but it is usually expensive to get this done in the US. (Always compare their rates with the interbank rates at Nowadays, if you are arriving in a large international airport, there is hardly any chance they won’t have ATMs available. I do bring $100 in US $20 bills in my money belt as an added backup.

When it comes to getting cash in local currency from ATMs, there are also fees to be aware of. The local ATM may charge a fee, although bigger banks are less likely to. Your bank may also charge a fee for using a non-network foreign ATM. Finally, they may charge a surcharge for the currency exchange itself.

Because I use a credit card for most large purchases, I usually only need cash for restaurants and other small things. Therefore, I usually take out all the cash I expect to spend during my stay all at once, as it is no more than a few hundred dollars. Since I only have to pay these fees once, I don’t worry about them as much.

For example, on a $300 withdrawal using my normal WaMu Free Checking account, I will be charged a 3% exchange fee + no ATM fees. I am okay with paying a one-time fee of $9 for this convenience. My backup card is with Bank of America, where it would have cost $8 total (1% + $5), though they do have some partner banks with no fees. I like sticking with big banks here.

A good comparison of all these card fees is located here.

Money Belt and Wallet
After experiencing firsthand how slick a professional pickpocket can be in an Italian train, I don’t go anywhere without my trusty money belt keeping everything hidden safely underneath my clothes. I usually put in my week’s worth of cash, my backup credit card, two ATM cards, emergency numbers, and my passport.

My wallet only holds a day’s worth of cash (~$40) and my primary credit card. I usually also have travel pants with zippered pockets. This way, if it gets stolen I am only out a small amount of money and one credit card.

Lost Your Credit Card While Traveling?
You can easily report your lost card to the major issuers while traveling internationally by calling these US numbers collect. Write them down and keep in your money belt, along with any credit card numbers.

  • Visa: 410-581-9994
  • Mastercard: 636-722-7111
  • American Express: 336-393-1111

Want To Bail On Your Stocks? Answer 2 Questions First.

In response to a few reader questions, all relating to moving their investments into something safer:

Question #1: Why do you really want to sell? Can you predict future movements of the stock market? I can’t. If you could, then you should have known these collapses were coming, shorted these stocks, and made a fortune. If you bet big enough, you’d be retired right now and not reading this.

So you’re not psychic. Then why? The real reason you want to sell is that your investments have dropped by 20% and you’re scared it will fall further. Okay, so you sell. How do you know when to buy back in again? If you use the same logic, you’ll wait until the market has gone up 20% already and you don’t want to be left behind. That’s just another way of saying buy high, sell low. Not a great way to make money.

Question #2: When do you need the money? If it’s still over 25 years from now, then what’s the worry? I don’t need this money for three more decades. Do you remember what the New York Times headlines were 25 years ago? You can bet they were worrying about something. Time horizon is important; Stocks are called long-term investments for a reason.

If you need the money a lot sooner, then you might want to re-examine your risk profile. But I’d still avoid making a rash decision.