Archives for June 2010

Lessons From a Stock Newsletter Scandal

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

I ran across another cautionary tale highlighting the world of paid stock newsletters, where people pay hundreds of dollars for “exclusive” stock picks.

In this one, former professional baseball player Lenny Dykstra somehow become a highly-touted investment columnist in 2005 for TheStreet.com. Here’s a video of Jim Cramer heaping praise upon Dykstra, calling him “one of the great ones” and one of the 5 people in the world he’d take stock advice from.

Dykstra specialized in deep-in-the-money calls, and promised a 95% success rate. He sold over a million dollars in newsletter subscription fees at TheStreet.com. Then things started falling apart.

Sharp bloggers exposed this scam: he counted his winners, but endlessly rolled over his losers, so that he could keep claiming no losses. He didn’t even make the picks himself; they were supplied by another stock analyst. His actual return on money was probably negative. Dykstra was fired in April 2009 and is now in bankruptcy.

The most recent allegation is that Dykstra secretly took $250,000 in exchange for recommending a little-known stock to his newsletter subscribers and “access” to Jim Cramer, according to sources within the company.

As you can see, stock newsletters can be very murky. How can you verify their advertised performance is true? Are they being paid to tout the stocks you’re reading about? Mutual funds are highly regulated. Stock newsletters are not.

Most stock newsletters are more about marketing than actual results. For example, did Cramer really think Dykstra was a genius? Or did he simply see the opportunity to leverage an athlete’s well-known name to create a lot of easy buzz and thus money?

Blippy.com: Are You What You Buy?

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

While flipping through old magazines at the Doc’s office, I read about a site called Blippy.com in a Time article. It’s yet another social media site, except this time you link up your credit card data so it can automatically share all your purchases with others (amount, store, and in limited cases actual items). You can add more details, and users can comment and discuss each others purchases.

The writer initially thought that such exposure would help control her spending (I call this the “shame” theory). Perhaps you really do eat out too much. However, many users of the site have found that instead people start actually buying items just so they could show up on Blippy. Want to look outdoorsy? Better buy some camping gear at Sports Authority.

Which made me wonder… Are you what you buy? My gut reaction is that the idea just sounds horrible. Does this really paint anywhere near a complete picture of yourself? Maybe it’s actually more objectively accurate than I think. I then thought maybe you are what you don’t buy… but that probably won’t work either. I wonder what people would think of my purchases. I can’t see myself signing up for this.

Still… Twitter is huge, and I’ve only just started trying to use @mymoneyblog regularly. Blippy has been called the “Twitter of Personal Finance”, and one of the co-founders of Twitter is a major investor. What do you think?

Would you be intersted in signing up at Blippy.com?

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Perkstreet Checking with 2%/5% Cashback Debit Card

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Perkstreet Card BannerPerkstreet Financial is relatively new, but they’ve already tried a bunch of different ways to make their online checking account attractive, from sign-up bonuses to coffee awards. However, I think they’ve stumbled onto something with their new cashback debit card rewards structure that beats out any other online bank currently:

  • Earn 2% cash back on all non-PIN debit card purchases when your checking account balance is $5,000 or more. For new accounts, you will earn 2% cash back no matter what your balance is for the first 3 months, starting on the day that your account is opened. (Otherwise if your balance that day is below $5k, you earn 1% cash back.)
  • Earn 5% cash back at a rotating set of retailers. This appears to be the new trend amongst many rewards cards. For October 2012, you can get 5% cash back at The Cheesecake Factory®, Pottery Barn®, Pottery Barn Kids®, PotteryBarn.com, Ace Hardware®, AceHardware.com.
  • PowerPerks 2.0 with deals updated every week
  • There is no limit to the amount of cashback you can earn.

Fees. The account has no minimum balance requirement, but does require you to have some sort of activity each month to avoid a $4.50 inactivity fee. Be sure to have some sort of deposit/withdrawal (electronic transfer is fine), debit card purchase, online billpay, or a cleared check every month.

The checking account earns no interest, so you’ll have to account for that based on your usual average balances. On the website, it advertises that you could earn $600 in rewards each year. Here’s their rationale:

Making $601 in weekly non-PIN purchases will earn you $625 in perks annually (when you maintain a balance of $5,000). According to the U.S. Bureau of Labor Statistics, the average American household spends $601 per week on purchases that could be put on a debit card, including stuff like utility bills or rent.

I’d adjust your expectations according to your own situation. I’ve never had a landlord that let me charge my rent on a debit/credit card, although I’m sure some are out there. 🙂 Example: Charging $500 a month at 2% back would be $120 a year.

Opening an account. They do try to make it easy… you only need $25 to open, and you can even do your initial funding on a credit card for up to $500; they promise to run it as a purchase to avoid cash advance fees.

For folks who already have a their preferred set of cashback credit cards, this might not be enough to switch. However, this does serve as a nice alternative for the subset of folks who choose to avoid credit cards for whatever reason. I have lots of friends that prefer debit cards due to the sheer simplicity of it – they buy something, and the money gets taken out direct from the checking account. Done. No extra bills to pay. I just read that 50% of all charge card purchases this year will be done on debit cards, so they aren’t alone.

Emergency: This Book Will Save Your Life (Book Review)

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“Terrorist attacks. Natural disasters. Domestic crackdowns. Economic collapse. Riots. Wars. Disease. Starvation. What can you do when it all hits the fan?”

Sounds like great travel reading, right? Well, it was, at least for me. Emergency: This Book Will Save Your Life by Neil Strauss is not, as you might think, a detailed survival manual, but mainly of one guy’s journey to try and protect himself from all that could kill him. He calls himself a “Fliesian”, based on the book Lord of the Flies, which in his words is “someone who believes that people, if put in a world where there are no consequences to their actions, will do horrible things.”

The first half of the book pretty much details all the things that could go wrong in the world, and his primary goal is to get a second citizenship from another country. The idea being that if the sh*t hits the fan here, he could in theory escape to safety to this other country. The main problem is that most countries, unless you are a citizen by birth or family, force you to renounce your US citizenship. However, it turns out that you can essentially “buy” citizenship in several countries for, oh, about $500,000 in the island country of St. Kitts. I thought this was quite anti-climactic, and not very useful knowledge for most of us.

One related theory that I did find interesting was on how to become a “perpetual tourist”, as to minimize your tax burden and maximize your personal freedoms. To achieve this, you will need “three flags” from three different countries:

  1. Have your citizenship somewhere that does not tax income earned outside the country.
  2. Have your businesses in a stable, low or no tax country.
  3. Live as a tourist in countries where you actually like to spend your time.

A nice idea, but we are not told how to make this actually happen. 🙁 We do find out that Swiss banks won’t even talk to U.S. citizens trying to open an untraceable account.

The second half of the book is more focused on actual survival skills. However, again it’s more of a story of how he takes a variety of different courses from shooting guns to camping to recognizing edible plants to tracking animals, and less of how to actually do these cool things.

The most practical part of the book for me was when he did a 3-day test where he shut off all of the utilities in his condo (water, gas, electricity) and tried to survive on his own. This is actually something I want to try. Most people know to keep some water and food. But how much water do you actually need? What if you don’t have enough? Another example of what you might overlook – where will you poop without flushing toilets? The cardboard port-a-potty he bought had bags that disintegrated in less than a day.

He also explores what’s needed in a bug-out bag, which is a kit designed for you to grab, run, and survive for about 72 hours. He points out that in a city-wide disaster like Katrina, it is unlikely that emergency crews will be able to help average citizens for up to a week. They’ll be too busy helping the seriously ill. You’ll be on your own.

This book was a very easy read, and definitely worth it the time spent if only to explore different possibles. I must say, I do have a certain fascination of living “off the grid”. In some areas near me, I figured that I could have a house that is both completely solar-powered with batteries, and could collect enough rainwater if not by a natural water supply. Too bad I get the shakes when I can’t check my e-mail for 24 hours…

VEIEX Fund vs. VWO ETF Performance Comparison

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

The bottom line for converting to the ETF version of equivalent mutual funds: lower costs = greater returns = more money. To illustrate this, I ran over to Mornginstar.com and compared the 5-year returns for VEIEX and VWO, the mutual fund and ETF versions of the Vanguard Emerging Markets Index Fund, respectively. Here’s the growth chart of $10,000 invested from 6/24/2005 to 6/24/2010 (click to enlarge):

Looks pretty much the same, right? That’s because they hold the same stocks inside, but VWO has a lower cost through its lower annual expense ratio. That initial $10,000 would have ended up as $18,086.98 invested in VEIEX, while it would have become $18,374.63 invested in VWO – a difference of $287.65. Not a huge difference, but significant in my book, considering it required no increase in risk.

This comparison also doesn’t take into the additional 0.5% purchase fees and 0.25% redemption fees charged by VEIEX when buying and selling shares, although the hit does become less significant as your holding period lengthens.

Vanguard Mutual Fund to ETF Share Conversions

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

If you are invested in Vanguard mutual funds, you might have been confused by their recent announcement of free trades for Vanguard ETFs for in-house brokerage customers. One consequence of this is that it makes it more attractive for many folks to convert their existing mutual funds to their respective ETF versions. Here’s what the Vanguard website has to say about it:

Can I convert conventional Vanguard mutual fund shares to Vanguard ETFs?

Shareholders of Vanguard stock index funds that offer Vanguard ETFs may convert their conventional shares to Vanguard ETFs of the same fund. This conversion is generally tax-free, although some brokerage firms may be unable to convert fractional shares, which could result in a modest taxable gain. (Four of our bond ETFs—Total Bond Market, Short-Term Bond, Intermediate-Term Bond, and Long-Term Bond—do not allow the conversion of bond index fund shares to bond ETF shares of the same fund; the other eight Vanguard bond ETFs allow conversions.)

There is no fee for Vanguard Brokerage clients to convert conventional shares to Vanguard ETFs of the same fund. Other brokerage providers may charge a fee for this service. For more information, contact your brokerage firm, or call 866-499-8473.

Once you convert from conventional shares to Vanguard ETFs, you cannot convert back to conventional shares. Also, conventional shares held through a 401(k) account cannot be converted to Vanguard ETFs.

In my opinion, the main question to ask is if you wish to buy ETFs from now on. See the Vanguard ETF vs. Mutual Fund decision process. If so, then it’s probably a good idea to convert your existing mutual funds to ETFs as well, since there is no effect tax-wise.

However, technically you could just convert your mutual funds to ETFs for the annual expense ratio savings, and then continue on buying mutual funds. Depending on the fund, the annual savings could be significant. You’ll still avoid any redemption fees, like the 0.25% that the Vanguard Emerging Markets Index Fund (VEIEX) charges. Perhaps you really like dollar-cost-averaging a fixed amount in regular intervals ($100 every two weeks, etc.).

How To Do The Conversion at Vanguard

  1. You’ll have to open a brokerage account with Vanguard, which is relatively straightforward. In the application, you’ll have to answer some employment questions and disclose any stock exchange affiliations. You’ll also choose a money market fund for your cash sweep account. See my Vanguard Brokerage opening process review for more details.
  2. Next, you should log into your mutual fund account and record the cost basis for your mutual fund shares for tax purposes. Look for the blue “Cost Basis” link when looking at your portfolio holdings. Print that page out for your records, so you know what you paid for your current holdings.
  3. Finally, you must call Vanguard and request the ETF conversion. (You can’t do it online.) The conversion will be done according to the net asset value (NAV) of the funds on the next available market close at 4pm Eastern. Approximately two days later, the new ETF shares should show up in your brokerage account. You will end up with partial shares, which can only be liquidated if you sell your entire position. It’s okay though, they still earn dividends and all that good stuff.

Vanguard Mutual Funds vs. ETFs: The Decision Process

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

You want index funds. You want Vanguard. Should you buy them in mutual fund form, or ETF form?

There are several pages on the Vanguard website dedicated to help you learn the differences between their ETFs and mutual funds. Check out their ETF basics page and their ETF vs. mutual funds page. There is a nice little video if you visit this page and look for this image:

Briefly, Vanguard mutual funds have different share classes. For their popular index funds, there is usually an Investor class of mutual fund, an ETF class, and an Admiral class for $100k+ balances. For example, for the Vanguard Total Stock Market funds, you have VTSMX (investor), VTSAX (admiral), and VTI (ETF). Each share class still holds the same basket of stocks. How they differ is primarily in trading structure, and both transaction and ongoing costs.

Reasons to Switch to ETFs

  • ETFs generally have lower expense ratios. This mean each year, all else equal, your net returns will be higher with the ETF than with the mutual fund. Over a long period of time, this savings can be substantial.
  • Greater trading flexibility. ETFs trade on an exchange alongside individual stocks, which means continuous intra-day pricing, and the ability to use advanced orders like limit or stop orders. (If you really want, you can even buy them on margin and/or short sell them.) Mutual funds are only traded at one price a day, and only with market orders.
  • No short-term redemption or other sell fees. This only applies to certain mutual funds.

Why You Should Stick With Mutual Funds

  • No automatic, dollar-based trading. If you like to dollar-cost-average, for example by automatically investing a regular amount of $100 every two weeks, then you would have to stick with a mutual fund.
  • Smaller balances. You need a $3,000 minimum to open a Vanguard Brokerage account. Also, if you have only say $2,000 in an IRA, you will be left with some uninvested cash because you must buy whole shares.
  • Bid/ask spread. This is a small transaction cost that represents the difference the offer and the sale price on an exchange, and ends up being profit for the market-maker. Vanguard provides estimates for the effect of this spread in their ETF calculator (see below).
  • Commission costs. This is not a concern in a Vanguard Brokerage account as they allow Vanguard ETFs to be traded commission-free, but in other brokerages they will charge their standard commission fees.
  • NAV premium/discounts. An ETF is allowed to trade above or below the actual value of the assets taken separately (NAV, or net asset value). Usually market forces and arbitrageurs keep such deviations from being large, and if you buy regular amounts it should even out over time, but at times the premiums can be significant. Some investors don’t like this uncertainty, and prefer the knowledge that they every purchase exactly at NAV.

Vanguard even created a nice mutual fund vs. ETF cost comparison calculator where you can punch in your number and see the long-term expected savings of buying ETFs. It takes into account bid/ask spreads, commission costs, future purchases, and more.

Google Voice Now Available To All In US

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Google Voice announced today that it is now available to everyone in the US, with no need to track down an invite. Here’s a nice, quick intro video for the service for the unfamiliar:

For more tips, see my previous post on how to save money with Google Voice. Did you know you can use it to get free long distance anywhere in the US with your landline? Or, you can give your out-of-state parents a local number they can now call to reach you without paying long distance charges either. GV has expanded their available area codes recently, although many areas are still unavailable for now.

I currently use Google Voice as an additional freelance work number to give out, as opposed to my “one number to rule them all”. I also have it set up to handle my voicemail for my cell phone, in which GV transcribes them and sends it to me as a text message. The overall transcription isn’t the best, but enough to get the general idea and it manages to excel at recognizing phone numbers. I do enjoy the convenience of just reading messages as texts, and being able to listen to messages online while traveling internationally.

Any Gizmo5 experts want to write a guest post on how to build your own VoIP phone service with Google Voice on the cheap? Update: Gizmo5 is closed to new accounts. Lifehacker has a post about using Sipgate to make free calls (a bit clumsily). Since I’m happy with my Ooma, I don’t think I’m willing to put in the research time. 🙂

Total Stock Returns = Fundamental + Speculative Returns

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Another theory of predicting future stock market returns states that there are three main components to long-term stock market performance. Amongst many others, I learned this from authors and investors Jack Bogle and William Bernstein.

Part 1: Dividend Yield
If your stock distributes 2% in dividends each year, then you will have a 2% contribution towards of return. This is what dividend investors love to see coming in each quarter, and is relatively easy to track for a large group of companies. Here it is over time for the S&P 500, courtesy of Multpl.com:

Part 2: Earnings Growth
If earnings stay constant, then all other things equal, one would expect the share price of your company to stay constant as well. If the earnings grow by 5% every year, then your share price will grow by 5% per year. Thus, earnings growth rate is a vital component of total return.

If your portfolio was all of the stocks traded in the United States, like that of a broad-based index fund, this would create a connection between the growth rate of the nation’s Gross Domestic Product and the earnings growth rates of all US companies. In other words, the fundamental return is based on GDP growth. In turn, the GDP growth rate is connected to population growth and productivity per person.

These two parts added to together are coined the fundamental return:

Fundamental Return = Earnings Growth + Dividend Yield

Some bad news: Now, from 1950-2000, fundamental returns were 10%: 4% dividend yield and a 6% earnings growth rate. These days, the S&P 500 has a dividend yield of only about 2%. Earnings growth rate estimates are subject to debate, but they hover around 5-6%.

Part 3: Changes in P/E Ratio
The price-to-earnings (P/E) ratio is the price per share divided by earnings per share. In other words, it is how much investors are willing to pay for each unit of earnings. If they are willing to pay 20 times annual earnings, the share price of the stock will be twice as high as if they only paid 10 times earnings. This part is denoted the speculative return, as it has changed throughout history. Here it is again for the S&P 500:

In 1950, the P/E ratio was less than 10. As of right now in mid-2010, it is 20. It is very unlikely that this more than doubling of price-per-share will happen again, with the historical average being around 15. (During the dot-com bubble, the P/E ratio was over 40. In 2008, it was over 25.) This will lead to a zero, and quite possible negative, future speculative return!

Summary

When predicting future returns, you have to look at all the sources of those expected returns. Fundamental return is still a solid reason why stock prices will go up on the long-term, especially if you are not investing only in one country or economy. Some people call it a belief in capitalism, that economic growth will continue and GDP will continue to increase. I simply believe in the passion and motivation of all the people out there, from Sweden to China to Brazil. However, there is good evidence that you might not be getting 10% historical returns due to P/E ratio contraction.

In a recent column, Larry Swedroe shares that the forecasts that he has read are predicting a 5% total annual growth in earnings and 2% dividends for a total return of 7% (similar to above). Inflation is predicted at 2.5%. However, he points out the current minimal-risk return is pretty low as well, so you need consider the big picture:

The bottom line is that while the expected nominal return to stocks is lower than the historical return, so is the expected return to Treasury bonds. You should decide if the expected risk premium for stocks is sufficient given your unique ability, willingness and need to take risk.

Skype World Cup Promo: Free Calls For a Month

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Want to talk World Cup trash with your international friends and family? Skype is offering a free month of calls to landlines to countries with teams playing in the World Cup, including the USA. (Skype-to-skype is always free.) You have to sign up for a subscription that you must cancel if you don’t want it to renew.

Offer available for lowest priced subscriptions to landlines in countries with teams playing football in the World Cup tournament in South Africa between 11 June and 11 July 2010 (excluding North Korea and Ivory Coast). Offer limited to 1,000 subscriptions to each of Nigeria, Honduras, Paraguay, Ghana, Algeria and Cameroon, and 100,000 subscriptions in total.

Subscriptions will be free for the first month. After this, your subscription will automatically continue and payments will be taken monthly unless you cancel. Offer expires on 11 July 2010.

Ohio 529 College Savings Plan Bonus Ends June 30th

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

This is just a reminder that the Ohio 529 College Savings Plan is still offering a $25 bonus if you are referred to open a new account and deposit at least $25 by June 30, 2010. You can apply for and fund the account all electronically, so you still have time. The referrer gets $50, and refer others after you sign up. I have an account with them, and my Ohio CollegeAdvantage referral code is 2439350. If you use it, thanks!

You can read more promotion details, account opening tips, and a review of the plan itself here.

Deluxe Rent-a-Car of LAX: Worst Car Rental Agency Ever?

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

I need to rent a car in Los Angeles next month, so I went onto Kayak.com and ran a quick search. The cheapest option at LAX was through a place called Deluxe Rent-a-car, at only about $20 a day including all taxes. It seemed so cheap, I instinctively ran a quick Google search for some reviews of this unknown company.

Wow, I have never seen such bad reviews for a rental car agency before. “Don’t do it!” “Stay far away from this place!” “Worst car rental agency in the galaxy!” “Economic Terrorists!” “They wiped my account clean of over $5,000” And those were only the first 5 entries. I kid you not.

What did the LA Better Business Bureau have to say? Oh, just their worst grade possible of F:

It’s almost comical, as if there was a competition to run the absolute lowest cost car rental agency possible without being shut down by law enforcement. (They’ve somehow been in business for 9 years.) Check out these user reports, including direct quotes from Yelp, TripAdvisor, and other review sites:

  • They don’t seem to actually check that they have the actual car you want before accepting the reservation. They just take all of them to get your business. Then when you arrive, if they have it, great, otherwise, they just give you whatever is available and refund you any difference. “My “standard convertible” became a Toyota Corolla with 65k miles with the check engine low tire pressure lights lit. It also had not been cleaned on the inside.” If they actually have no cars left at all, then oops – too bad!
  • They charge everyone a $400 deposit, which is actually charged first onto your credit card, and then they have to reverse it later if they deem everything acceptable. If you get a parking ticket, they’ll charge you $125 + the cost of the ticket.
  • The shuttle doesn’t actually arrive in the Rental Car pickup section of LAX. It picks you up in the Courtesy shuttle area, with a “Johnny Park” sign instead of Deluxe Rent-a-Car. Does one area cost more to use or something? Finally, they only promise to run every 15 minutes instead of every 5 minutes like the other major agencies. Users complained of 45-minute actual wait times. I lost count of the reviews from confused customers.
  • The cars are dirty. Lots of pictures of stains on Yelp, and also claims of broken glass and bad smells. Don’t expect your “non-smoking” vehicle to actually be that way.
  • Multiple instances of the car registration being expired, yet the car was still rented out. Nice.
  • Rude employees. Too many stories to generalize any other way.
  • Gas policy: You get whatever the last renter left in the car. They apparently don’t have gas pumps at their facility. So you might pick it up empty, 1/4 full, or whatever. If it’s nearly empty, they generously tell you whatever is left is yours. If it happens to be half full, they tell you to bring it back half full.

Let this serve as a warning for potential renters, and entertainment for everyone else. Caveat emptor. As for me, after some more searching I found a coupon for Enterprise that resulted in an even lower rate than “Deluxe” per day. (I also grabbed an additional 2% cash back from Mr. Rebates.) Kayak should really remove this company from their price comparison engine!