Archives for February 2010

Best Banks With Consistently High Interest Rates

It’s one thing to find a bank with a high interest rate, and another thing to have that rate stay high. Many banks post teaser-like rates to attract deposits, and then hope you’ll be lazy and stay while they gradually become uncompetitive. A post yesterday on the NY Times Bucks blog explored ways to counter this.

Bankrate does a quarterly ranking of top banks with consistently high yields, which is “based on the number of times within the quarter that an institution’s yield was among the top 20 for the product category and the relative position of the yield in relation to the others in the product category.” But that’s only one quarter. So the Times asked them which banks have been on top for every single of the last eight consecutive quarters (Q1 2008 to Q4 2009). Good idea!

The next natural question: Which of these banks has the highest rates now? So I visited each site and found the current rates (as of 11/12/13) for their highest yielding savings account (or money market) and their 12-month CD. Since some of the rates were tiered, I picked the rate for a $10,000 deposit and also included the minimum balance needed to avoid fees. Here are the results, sorted by top overall yield:

Banks
Online Savings / Money Market
12-month CD
0.86% APY / 0.86% Intro ($5k+)
0.60% APY
Discover Bank
0.85% APY / 0.70% ($10k+)
0.95% APY
Ally Bank
0.85% APY (No min)
0.98% APY
Stonebridge Bank
1.25% APY ($1k+)
1.50% APY
Intervest National Bank
1.13% APY ($500+)
1.50% APY
American Bank
0.90% APY ($10k+)
1.30% APY
MetLife Bank
0.85% APY ($10k+)
1.15% APY
First National Bank of Baldwin County
0.50% APY ($5k+)
1.35% APY
M&T Bank, NA
0.50% APY (No min)
1.10% APY
UmbrellaBank (now Beal Bank)
0.50% APY ($1k+)
1.06% APY
0.15% APY ($10k+)
1.11% APY

AT&T Wireless AutoPay $20 Promotion

Looks like AT&T Wireless is offering folks a $20 gift card if they sign up for automatic payments on a Mastercard. Good for covering part of those iPhone monthly fees!

You will receive a confirmation email in 1-2 days and your Gift Card will arrive in 4-6 weeks. It’s that easy! Log in today.

Mint.com Wants Limited Power of Attorney

A reader recently asked me about what I thought about the fact that financial aggregation site Mint requires you to give them limited Power of Attorney when using their website. There was also a recent discussion on Bogleheads about it. You can find it in the Terms of Use Agreement page.

For purposes of this Agreement and solely to provide the Account Information to you as part of the Service, you grant Intuit a limited power of attorney, and appoint Intuit as your attorney-in-fact and agent, to access third party sites, retrieve and use your information with the full power and authority to do and perform each thing necessary in connection with such activities, as you could do in person. YOU ACKNOWLEDGE AND AGREE THAT WHEN INTUIT IS ACCESSING AND RETRIEVING ACCOUNT INFORMATION FROM THIRD PARTY SITES, INTUIT IS ACTING AS YOUR AGENT, AND NOT AS THE AGENT OF OR ON BEHALF OF THE THIRD PARTY. You understand and agree that the Service is not sponsored or endorsed by any third parties accessible through the Service.

Sounds serious! My first thought is that without this clause, Mint could not perform their intended service of being a one-stop shop for all of your online financial accounts. They would essentially have to walk up to every single site and ask for permission to be an official portal for them, yet at the same time be released from liability. That would be basically impossible.

In the end, you are giving up some of your rights in exchange for the convenience of having all your accounts checked for you at once. If you are worried about something going wrong with either Mint, a rogue employee, or a malicious hacker getting access to your personal information, then you might consider limiting what accounts you link.

Along that line, I would think that credit cards would be both the most helpful to link since you can then track your expenses, while also having the least exposure to fraud. This is because as long as you report any fishy behavior to your credit card issuers as soon as you find it, you likely won’t be liable for any unauthorized charges. (And if you monitor regularly with Mint, you’ll be that much more likely to notice…)

However, I for example would be more hesitant to link my Vanguard and Fidelity accounts with the bulk of my IRAs and brokerage accounts, as the benefits aren’t as great. Most of my net worth is stored at those brokers, and any screw-up would be highly stressful. Besides, I can usually check my balances at those sites separately with little added effort.

What do you think?

Grocery Prices: Name Brand vs. Store Brand vs. Organic

Here are the results of a recent study by industry research firm IBISWorld that compared the price of an average grocery cart in Los Angeles, New York City, and Chicago.

In general, organic products cost about 20% more than simply name brand items. However, the organic grocery cart is nearly 40% more expensive than a cart filled with store-branded products whenever possible. I wish there was more information on what makes up an “average” grocery cart, but I’m guessing it contains a wide variety of items.

Which reminds me of a previous post on which fruits and vegetables you should buy organic. If you value organic but are still on a budget, certain conventionally-grown vegetables retain much higher amounts of pesticides than others. Prioritize your spending with this updated list from Foodnews.org (you can even download an iPhone app with the chart):

Real Estate Price Trends Across United States – Zillow

How’s the housing market in your area doing? You can find what Zillow thinks in their Real Estate Market Reports for many metro areas. There are lots of options to play with; you can view different metrics, change the time period, or even compare entire states.

Here’s a graph of Zillow’s Home Value Index for the US as a whole as well as selected large cities over the past decade. As you can see, there was a wide range of price swings from city to city.

It would interesting to see the same chart but with rental rates instead.

Find The Best Charities: Best Charity Comparison Websites

With the recent natural disasters and also economic recession, many people are being extra careful to make sure their donations go as far as possible. Earlier this month, BusinessWeek ran an article Philanthropy: Rethinking How to Give which did a good job exploring the many websites now available to help you do just that. Initially, most websites focused on financial factors like what percentage of donations go to administrative or fundraising expenses, whereas now many sites tackle the harder task of measuring actual impact for the dollar.

Here is a list of the links, along with a quick description of that makes them unique, as they each have a slightly different approach. What was new to me was the idea of giving to a mutual fund-like portfolio of charities focused on a specific area, like education or global health.

  • CharityNavigator – Largest and well-publicized charity rating site, provides a 4-star rating based primarily on financial criteria.
  • GiveWell – Tries to identify the best charities, not rate them all. Focused primarily on charities working internationally
  • GreatNonProfits – Allows clients, volunteers, and funders to post personal reviews based on their experiences.
  • GuideStar – Tries to be a one-stop shop for both financial data and personal reviews of charities. Must register to see a lot of things, and pay a subscription fee for premium in-depth data.
  • Partners for Change – Tries to educate and direct “mass affluent” philanthropists (who donate at least $10,000 per year) towards a mutual fund-like portfolio of charities.
  • Philanthropedia – Ranks non-profits based on opinions of experts, and groups them to mutual fund-like portfolios.
  • Root Cause – Provides detailed “social impact research” reports to larger groups and financial advisors.

Notes and Lessons from Liar’s Poker: Rising Through the Wreckage on Wall Street

Here’s a book review of an oldie-but-goodie. Liar’s Poker by Michael Lewis is a non-fiction account of the author’s experiences as a 24-year old the 1980s who started working as a bond salesman for Salomon Brothers, one of the most powerful investment banks at the time (now folded into Citigroup).

Half of the book is an insider’s view of the fast-paced and testosterone-driven world of trading and sales on Wall Street. Lewis explains terms like “Big Swinging Dick” and how he made of dollars of profits for the company, sometimes by necessarily screwing a few customers over. Don’t ever forget their priorities! Here is a quote from a 2008 Portfolio article where Lewis takes a look back:

When I sat down to write my account of the experience in 1989—Liar’s Poker, it was called—it was in the spirit of a young man who thought he was getting out while the getting was good. I was merely scribbling down a message on my way out and stuffing it into a bottle for those who would pass through these parts in the far distant future. Unless some insider got all of this down on paper, I figured, no future human would believe that it happened.

The other half explains how some of the most powerful securities in the world were created – namely high-yield “junk” bonds (which exploded in the late 1980s) and mortgage-backed securities (which took longer, and exploded in the late 2000s). They saw an opportunity:

From the early 1930s legislators had created a portfolio of incentives for Americans to borrow money to buy their homes. The most obvious of these was the tax deductibility of mortgage interest payments. The next most obvious was the savings and-loan industry.

The savings and loan industry made the majority of home loans to average Americans and received layers of government support and protection. The breaks given savings and loans, such as deposit insurance and tax loopholes, indirectly lowered the interest cost on mortgages, by lowering the cost of funds to the savings and loans. The savings and loan lobbyists in Washington invoked democracy, the flag, and apple pie when shepherding one of these breaks through Congress. They stood for homeownership, they’d say, and homeownership was the American way. To stand up in Congress and speak against homeownership would have been as politically astute as to campaign against motherhood. Nudged by a friendly public policy, savings and loans grew, and the volume of outstanding mortgages loans swelled from $55 billion in 1950 to $700 billion in 1976. In January 1980 that figure became $1.2 trillion, and the mortgage market surpassed the combined United States stock markets as the largest capital market in the world.

Following the money, in 1986 Salomon Brothers created the first mortgage derivative. Soon after, they figured out how to take BBB-rate bonds with a unknown maturity and perform financial voodoo to create top AAA-rated bonds with more predictable maturities. (A good explanation of collateralized debt obligations (CDOs) and tranches is in the video Crisis of Credit Visualized.)

Lewis also learned the trader mentality:

Many of the trades that [mentor] Alexander suggested followed one of two patterns. First, when all investors were doing the same thing, he would actively seek to do the opposite. The word stockbrokers use for this approach is contrarian. Everyone wants to be one, but no one is, for the sad reason that most investors are scared of looking foolish. Investors do not fear losing money as much as they fear solitude, by which I mean taking risks that others avoid. When they are caught losing money alone, they have no excuse for their mistake, and most investors, like most people, need excuses. They are, strangely enough, happy to stand on the edge of a precipice as long as they are joined by a few thousand others. But when a market is widely regarded to be in a bad way, even if the problems are illusory, many investors get out.

All in all, this book was a very fun read. It reminded me of somewhat of Ugly Americans by Ben Mezrich, but Liar’s Poker had a much more authentic and feel of historical significance to it.

Quicken 2010 50% Off Coupon Code

Quicken also sent me a 50% off link to all their 2010 products. Offer good only until 2/22/10. The following Special Offer Code was included in the e-mail: 6321762157. Download version might be better if you plan on returning?

Note: Offer applies only to purchase of Quicken Deluxe, Premier, Home & Business, or Rental Property Manager when you order directly from Intuit by February 22, 2010, 11:59 PM PST.

If you’re not 100% satisfied, return Quicken 2010 software with your dated receipt within 60 days of purchase for a refund of the purchase price (return shipping and handling charges are not included).

Giveaway: QuickTax Platinum Tax Software For Canadians

I don’t know how many Canadian readers I have, but I do have one free copy of QuickTax Platinum ($69.99 value, download version) available to give away.

The Platinum version is the most fully-featured “personal” edition, and includes assistance with investment gains/losses and rental property, as well as RRSP guidance. Other than that, I don’t know much about QuickTax, other than it is made by Intuit and thus looks a lot like TurboTax in the US. However, there doesn’t seem to a similar product by H&R Block for the Canadian market. Who is their biggest competitor then?

To enter, simply leave a comment with a valid e-mail in the proper field below by Midnight Pacific on Sunday, 2/21. Real name not necessary, you can even leave the actual comment box blank. One entry per reader. I’ll randomly pick one winner. Thanks!

Could You Own Less Than 100 Things?

Another topic I’ve been interested in is the 100 Thing Challenge started by Dave Bruno. If you read a lot of simplicity blogs you’ve probably already heard of it, but it’s a pretty simple idea: Live with only 100 personal possessions. You can always quibble about what is a “thing” – a pair of socks, or all your socks? Your nail clippers, or all toiletries? But you get the basic idea.

The goal of the 100 Thing Challenge is to break free from the confining habits of American-style consumerism. A lot people around the world feel “stuck in stuff.” They feel like their closets and garages are too full of things that don’t really make their lives much better. But how to get unstuck?

Reduce (get rid of some of your stuff)

Refuse (to get more new stuff)

Rejigger (your priorities)

Press coverage has included Time magazine, USA Today, and The Times (UK). Here are some lists of folk’s sub-100 inventories:

Seems like clothes usually take up at least 20 items. Since this challenge basically requires that as many things as possible be digitized, I’ve been eyeing out this $400 Fujitsu bulk scanner out… even though that would be a new thing.

Cheap Airfare Links & Bookmarks

This week, the New York Times offered up two helpful articles about the current best sites for finding cheap airfares: Booking a Flight the Frugal Way by the Frugal Traveler and Sites That Do Your Fare Digging by the Practical Traveler. I guess nobody wants to hear from the Disturbingly Rich and Wasteful Traveler.

Instead of having to read through these long articles again every time I need to book a flight, I found myself just making a list of all the handy links that were thrown out.

  • Kayak.com
  • Bing Travel (also bought FareCast)
  • Momondo.com
  • ITASoftware.com (doesn’t sell tickets)
  • cFares.com ($50 annual fee, but pays rebates)
  • Yapta.com – Tracks flight prices
  • Vayama.com – International flights
  • Airfare.com – International flights

Fidelity Portfolio Advisory Service Review w/ Actual Holdings

Have you seen those “follow the green line” ads from Fidelity? Well, they reminded that a reader sent me their retirement account holdings for review which was managed through the Fidelity Portfolio Advisory Service (PAS). This is a managed portfolio service, which means that you pay Fidelity a fee and they do all the research, selection, buying, and selling for you. Fidelity has two managed-portfolio tiers for individual investors, with the Portfolio Advisory Service for account balances of $50,000+, and the Private Portfolio Service for those with $300,000+ to invest.

At only a $50,000 minimum portfolio size, it appears that the PAS is targeted a relatively large portion of the generic public. Unfortunately, in the wealth management business such small balances usually also mean generic, cookie-cutter portfolios with little or no personalization. Here’s what Fidelity says:

In the Fidelity Portfolio Advisory Service product, customers are invested into model portfolios of Fidelity and non-Fidelity mutual funds based on their time horizon, risk tolerance and investment goals. These model portfolios are managed by a team of investment professionals that includes Portfolio Strategists and Mutual Fund Analysts.

Sounds like “we make you answer a short questionnaire and the computer spits out an asset allocation” to me. Let’s see how Fidelity constructs this person’s portfolio. I will mention here that this is an IRA account, so that taxes aren’t a huge concern.

Portfolio Comparisons

Benchmark Portfolio
This particular account used the “Growth w/ Income Portfolio” benchmark, which has an overall 60% Stocks/40% Bonds balance. Other portfolio options are Conservative (20% stocks), Balanced (50% stocks), Growth (70% stocks), Aggressive Growth (85% stocks), and All Equity (100% stocks). Here are the indexes and asset allocation for this portfolio.

Stock
50% Total US (Dow Jones US Total Stock Market Index)
10% Developed International (MSCI EAFA Index)

Bond
25% US Investment Grade Bond (Barclays Capital US Aggregate Bond Index)
10% US High-Yield (Merrill Lynch US High Yield Master II Constrained Index)

Cash
5% Treasury Bills (Barclays Capital 3-month US T-Bill Index)

Hypothetical Index Fund Portfolio
As mentioned in the statement, you cannot invest in an index. So, I created below a portfolio consisting of actual investments that passively track the above indexes with minimal costs. I chose the cheapest ETF that tracks the exact index if possible, not the cheapest ETF that was similar. I also included the annual expense ratios.

50% SPDR Dow Jones Total Market ETF (TMW) 0.21%
10% Vanguard Europe Pacific ETF (VEA) 0.16%
25% Vanguard Total Bond Market ETF (BND) 0.14%
10% SPDR Barclays Capital High Yield Bond (JNK) 0.40%
5% SPDR Barclays Capital 1-3 Month T-Bill (BIL) 0.13%

The total weighted expense ratio was 0.20%.

Actual Fidelity-Managed Portfolio
The actual choice of investments in this account matches the benchmark asset allocation closely, and included over 30 different mutual funds. You can view the entire mutual fund list here, but here is the overall breakdown:

51.5% US Stock Funds
10.0% International Stock
28.5% Investment-Grade Bonds
10.0% High-Yield Bonds
0% Cash

This includes a mix of twenty (!) different actively-managed domestic stock funds from both Fidelity and outside companies like Janus and T. Rowe Price (Okay, 1.5% was in one index fund – S&P 500 Fidelity Spartan.) The average expense ratio for these was approximately 1%. Six different international stock funds were included, with an average expense ratio of ~1.2%. The overall bond fund expense ratios were 0.8%. This brought the total weighted expense ratio to ~0.94%.

Performance Comparisons

Now for the important part, returns after all fees. This account was not ten years old, so the best long-term return number was the 5-year historical annualized returns. The statement was as of 6/30/09.

First up, we have the 5-year annualized of the Benchmark Portfolio, which as of 6/30/09 was 1.6%. Of course this is a benchmark, which doesn’t include any management fees or commissions.

I was unable to find performance numbers as of 6/30/09 for my Hypothetical Index Fund Portfolio as it is already 2010 (if someone knows how to do this please let me know). However, we can estimate the return since the total weighted expense ratio was 0.20%. If we estimate trade commissions to be $5 per trade x 5 ETFs = $25 per month… on a $100,000 portfolio that is 0.30%. (Such trade commissions would be zero if held at Zecco or WellsTrade, given the account size.) Assuming the ETFs follow the indexes closely, then the 5-year returns would be in the neighborhood of 1.1%.

Now, what was the actual 5-year annualized return on this fully-managed account? -0.6%. Yes, negative 0.6%.

Conclusion

Over the past 5 years, the Fidelity Portfolio Advisory Service managed to construct a portfolio that lagged a simple index fund portfolio by 1.70% annually. That’s a huge difference over time. Use any compound interest calculator and stick in two numbers that differ by 1.7%, and you’ll see the effect of compound interest working against you for a few decades. Why did this account perform so poorly relative to its benchmark? Isn’t it supposed to beat the benchmark?

Too many advisors. To me, if people choose to hire someone to manage their investments, it would be to tap into their expertise and special insight. I’d want him/her to make calculated bets that will beat the market. Putting my money in 34 different mutual funds, each with their own team of advisors, seems like everyone’s bets would cancel each other out.

While the reason given for so many funds was “diversification”, the only phrases that came to my mind were “overlap” and “lack of focus”. You don’t need to own a ton of funds to get diversification. With so many funds, you’d probably end up owning the same companies as the index fund anyway.

Costs matter. The actively-managed mutual funds are the first layer of expenses, which was a weighted 0.94%. Then there is the second layer of management fees charged by Fidelity, which includes all trade commissions and varies from .25%–1.7% based on asset levels. In this account, it was 0.8%. Thus, in order to simply match the benchmark, the investments chosen would need to outperform it by 1.74%. Every. Single. Year. That is a stiff headwind.

The really sad thing is, even if I just invested in the index funds through the Fidelity PAS and basically paid them to do nothing, I would have still done better than the funds they chose. 1.6% index – 0.2% index fund expenses – 0.8% Fidelity fee = gaining 0.60% a year. Compare that with losing 0.60% a year.

For a $200,000 portfolio paying 1.38% in portfolio management fees, that’s $2,760 a year. Don’t pay nearly 3 grand a year for a cookie-cutter asset allocation that doesn’t even match an index fund. It can be well worth your time to learn more about investments yourself. Here are some starting ideas.