Book Review: Explore TIPS, A Guide To Buying Inflation-Linked Bonds

No, this not another book on gratuities and service workers. In the investing world, TIPS stands for Treasury Inflation-Protected Securities, which are bonds issued by the US government that pay interest which is linked to inflation. Inflation is measured by the Consumer Price Index (CPI).

As a greatly simplified example, if you bought a TIPS bond with a real yield of 2% and inflation ends up at 3%, your return would be 5%. If inflation later on jumps to 8%, your return would be then 10%. Most bonds are what we call nominal bonds. They pay a certain interest rate like 5%, regardless of what inflation is. Thus, having such inflation-linkage provides protection against inflation that is higher than expected.

These are just the basics. A cynic would tell you that you don’t hear much about TIPS because they don’t make Wall Street very much money. However, I think they are a critical component of my portfolio. So how should you go about buying them? Enter the book Explore TIPS by the anonymous blogger and former guest poster The Finance Buff. For example, it will show you how to navigate the many different ways you can buy TIPS:

  1. Via a mutual fund or ETF like VIPSX or TIP
  2. Via an official auction through TreasuryDirect or a broker
  3. Via the secondary market, through a broker

As with many things, buying them directly gives you more control, but less convenience. The good thing is that like Treasury bonds, holding a single bond has the same credit risk as holding 100 of them. However, you’ll need to understand things like noncompetitive bids (actually a good thing), yield-to-maturity, and inflation factors.

Even though it’s only about 100 pages long, Explore TIPS definitely comes through as its tagline promises: “A Practical Guide to Investing in Treasury Inflation-Protected Securities”. It may take a while to get through… even I don’t get excited about reading about bonds. Well, maybe a little. 😉 Now, you could probably learn most of this stuff on your own if you spent all your time browsing investment forums and the Treasury website, but this tidy reference book will save you loads of time. On Amazon it currently runs $11.96, but you can buy the PDF version for $4.95.

Consumer Reports On Credit Scores & Credit Card Bonuses

The standard personal finance magazine advice is to apply for as few credit cards as possible, ostensibly to keep your credit score high. However, a recent Consumer Report article which tries to make the same case, actually ends up making a better case for applying for a steady stream of credit cards, especially when they are paying you big bucks to do so. Let’s break down the article section-by-section.

How many cards are too many?
Contrary to popular belief, having a lot of credit cards is not detrimental to your score. That’s because one component of the scoring formula is the ratio of balances to credit-limit utilization. The more available credit you have relative to the amount you charge each month, the higher your score is likely to be.

Here, if you have more cards, or at least higher credit limits, the high your credit score will be. Your credit score will also be more resilient, say, if you make a large purchase or spend more than usual on vacation.

Should I apply for several cards?
Your score can be affected by any new credit issued and the number of recent inquiries on your report resulting from your applications for new credit. FICO usually excludes inquiries that show you’re rate shopping for college loans, auto loans, or mortgages, but not credit cards. Every credit card you apply for will be considered a hard inquiry on your credit record; inquiries remain there for 24 months and could affect your score for the first 12.

If you have a lengthy credit history, such inquiries shouldn’t affect your score much, if at all. But if your credit history includes only one other account and you open a new one, the length of your average credit history will be halved and your score will probably drop.

Again, we see that if you only have a few credit cards, then your score is susceptible to dropping with just one new credit inquiry. However, if you have a bunch, then your score is again more resilient. As for the actual effect, a variety of reports from various credit forums has shown me that the effect of a hard inquiry lastly only for about 6 months, and goes away quickly after that. I personally apply for a round of cards every 6 months in response. Note the article carefully dances around this by saying it “could” affect your score for up to 12 months.

Should I keep my oldest card?
It’s a common belief that you should never close the card you’ve held the longest. (The length of your credit history makes up 15 percent of your score.) But credit bureaus usually leave closed accounts on your file for 10 years, so your long-held cards will still be factored into your score after you ditch them. If you’ve obtained other credit accounts over the years, closing one card shouldn’t have a big impact unless it represents a significant portion of your available credit. In that case, closing your old card could hike your balance-to-credit ratio and lower your score.

Yet again, counter-intuitively, by applying for a lot of cards regularly over the last few years, closing cards does not significantly affect my credit score. My average age will always be pretty long. Of course, I still try to keep my oldest cards open.

When should I ditch a card?
I’ll just override Consumer Reports on this one. You should ditch a card whenever it saves you money. If a card charges an annual fee and you don’t think the benefits attached are worth it, then you should cancel it. If your interest rate is too high and you can do better elsewhere, cancel it. Simple as that. If you applied for a new card with a nice bonus and they denied you saying you have “too many cards with us”, then call them up and offer to close your old card, and chances are they’ll be happy to oblige in order to keep your business.

Top Credit Card Bonuses Roundup – July 2011

If you have a good credit score and the discipline not to get into consumer debt, you can profit from your responsibility by participating in various credit card sign-up incentives. The bonuses are not subject to tax, and by applying for only the best offers, you can add thousands of dollars to your income a year.

$500 in Gift Cards or $500 towards Student Loans, your Mortgage, Airfare or Hotel

The Citi ThankYou Premier Card is competing with a 50,000 ThankYou Point bonus. You get 50,000 bonus ThankYou Points after $2,500 in purchases within 3 months of account opening. 50,000 points is worth $500 in gift cards, airfare, or a check towards your student loan or mortgage. No annual fee. See this post for details.

$625 towards Airfare or Hotel

The Chase Sapphire Preferred is a rewards credit card offering new cardholders 40,000 bonus points after you spend $3,000 in purchases within the first 3 months. 50,000 points can be redeemed for $625 in travel since they offer a 25% boost towards airfare and hotels. No annual fee for the first year, $95 in future years. They also offer 2 points per dollar spent on dining & 1 point per dollar spent on all other purchases. Additional details here.

This is their new travel-oriented card, with no foreign transaction fee on purchases and you can also earn points based on the amount of miles you actually fly. The annual fee is free the first year, $95 in later years if you keep it. Alternatively, if you want a card with no annual fee period, the Citi ThankYouSM Preferred Card is offering 25,000 bonus points after $2,000 in purchases within 4 months.

“Disclaimer: This content is not provided or commissioned by the issuer. Opinions expressed here are author’s alone, not those of the issuer, and have not been reviewed, approved or otherwise endorsed by the issuer. This site may be compensated through the issuer’s Affiliate Program.  “The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.”

Book Review: Early Retirement Extreme

Earn more, or spend less. That’s what you have to do in achieve financially independence. My own philosophy has been to try and earn more than average, perhaps look about average to casual observers, and spend below average. Now, what if instead you earned about average, but spent way, way below average?

Various studies have shown that with a portfolio of about 60% stocks/40% bonds, you can withdraw 3-4% of your portfolio value each year (inflation-adjusted) and have a 95%+ chance that your money will last a lifetime. Using a 4% rate, that means to retire, you’ll need to save up 25 times your expenses. So if you spend $40,000 a year, you need $1,000,000. By that same math, if you only spend $8,000 a year, you only need $200,000 to retire.

Impossible, you say? Not to Jacob Lund Fisker, author of the book Early Retirement Extreme, who says he lives on about $10k a year and retired by 33. Extreme is a good word for it, though. In the US, the poverty line for a single person is $10,890; for a family of four is $22,350. But that’s how he can make the following claim about his book:

It’s possible to retire and live on invested savings after just five years of full-time work.

Five years?! No, I don’t think he’s crazy. I think it’s awesome that he presents such a different perspective, even if few others can achieve it. He observes that as humans we are more productive than ever, yet we work just as hard or harder than before. The opportunity for early retirement is definitely within grasp in this country.

So how do you manage to lower your expenses to such a level? You’ll likely need to alter your entire philosophy. Living a low-cost, self-sufficient lifestyle must be the end goal, not just a means to an end. If being financially free means driving fancy cars and eating at a new restaurant every night, this will not work for you.

Being Fisker’s ideal “Renaissance man” means going back to when people were mostly generalists (proficient at many things) instead of specialists (exceptional at one thing and outsourcing everything else). It means buying stuff that last forever (high-quality shoes), and learning to fix stuff that doesn’t (darning your own socks). It means not using air conditioning and accepting that sweating also cools you off. It means being willing to bike/run/walk 5 miles to the store instead of jumping in a car. It means living in smaller, more efficient housing that should cost no more than $200-$350 per month per person. It means not paying $100,000 for a college education, but going to a trade school or apprenticeship instead.

Going back to the 4% withdrawal rate. Let’s say your cable bill is $40 a month. That means you would need to save up $12,000 solely to pay for your ongoing cable bill. Is cable TV worth $12,000? Maybe, maybe not. Now do this for all your expenses.

Investing philosophy. Fisker does not like “Buy and Hold” or even low-cost index funds as an investment strategy. However, he does not offer up a satisfying alternative. There are some vague references about how if you devote some time to learning about investments, you’ll be able to earn much better returns. After gathering up clues from the book and his blog, I can only guess that he focuses high dividend stocks that have a very small market cap and thus avoid Wall Street analyst attention (a less efficient market). He doesn’t share actual holdings, so we are unable to follow along or track returns.

Conclusion

Jacob is a Physics PhD and this book is written like a scientific paper or textbook. The text is small, the information is densely packed in, there are lots of footnotes, and it was even written with LaTeX. Much of the same material is available from Jacob’s blog at EarlyRetirementExtreme.com. I recommend reading the archives chronologically from the beginning, especially now because there are few new articles (most are simply randomized re-posts of his old ones and it can get confusing).

In the end, I enjoyed reading this book primarily because it is so “extreme” and thus different from any other book on my nightstand. Even if you don’t adopt his philosophy entirely, it will hopefully make you question some of your current choices. I feel that we need more insight on this side of the spectrum, as opposed to all the attention on the “I sold my company to Google and made a bajillion dollars that’s how I retired early” folks.

BeenVerified Android & iPhone App: Free Background Checks

It’s the digital age, and we all leave a digital trail. Enter BeenVerified.com, a site that aggregates all of the public record databases available for any given person. Their background checks include an address history (property records, addresses, appraisals), names of relatives, criminal records, and social network data (site memberships, links to profiles, pictures). Right now, they have a free Android and iPhone app where you can get a free background check every 30 days. (The site offers a 7-day free trial, but the apps don’t require any credit card or personal info.)

They warn that these checks should not be used for “employment, tenant screening, or any FCRA related purposes.” That last part about the Fair Credit Reporting Act means you can’t use them to decide whether to provide things like credit or insurance. BeenVerified.com is not a credit reporting agency, and really all they’re doing is scraping a bunch of stuff from the internet that may or may not be accurate at all. This is all disclosed in their lengthy Terms of Service, so be careful.

So what do you use it for? Well, for one you can see what personal info about yourself is out there. Their target audience include people checking out potential dates or household workers like babysitters or contractors.

More: Techcrunch, Gizmodo

S&P 500 at 1300: A Look Back 3 Years Ago

I was looking through some old posts looking for writing inspiration, when I found this one that I had completely forgotten about:

S&P 500 at 750: Thoughts From A Market Timer – Published 11/21/2008

I still remember that night rather vividly. I was on a business trip in yet another bland hotel, stuck watching CNN. The S&P 500 index had closed at 752.44, a number I though I’d never see. I logged into my Vanguard account from my laptop and watched my account values dropping, but I also sensed an opportunity. Investing gurus were always saying to buy when people were most scared. This Hussman fellow made a convincing argument that the odds were in my favor. I actually had another draft of that post with the alternate title “S&P 500 at 750: Time to Back the Truck Up?” I tentatively put in a buy/sell order to move all my money into stocks.

But I didn’t execute it. Why? I was scared. And if you read the comments on that 2008 post above, lots of other people were scared too. And it did get worse for a while. I managed not to sell everything in a panic. In fact, I didn’t sell any stocks at all. I just kept with my asset allocation and rebalanced, which meant that all my new paycheck money went into stocks. Here’s the chart of the S&P 500 since I graduated college:

Not exactly a smooth ride! Today, my portfolio is bigger than ever, but I still feel the some uncomfortableness investing with the S&P 500 at 1300. Is it too high now?

Buy, hold, rebalance. This method will always have its doubters, but I believe in it more strongly as the years have passed. This means that I’ll never be able to brag on the internet how I was “100% cash right before the crash” or “Moved all my money into stocks right before the big boom”. However, I do feel it has improved my investment returns, and that’s the real goal.

Reading: Calorie Labels Fail, Family Income Growth is Deceiving, Law School Economics

Here’s some articles that caught my eye this week:

Calorie counts don’t change most people’s dining-out habits – Washington Post
Apparently, telling people the amount of calories on menu items doesn’t change their eating habits, cheap or not. Now, I know that I personally do find it helpful, because many times I’m eating out primarily to hang out with friends and the food is not the goal. But in general, we must fight our human nature:

Experts say that for most diners, the issue is not about having information but about lacking self-control. Behavioral economists have for years zeroed in on a logical hiccup: We are unable to balance short-term gains with long-term costs. Many humans are simply really, really impatient. With eating out, the gains are immediate (yummy giant burrito!) and the costs are delayed (staggering bills for heart disease!).

Overtime, Not Wage Increases, Drive Income Growth – WSJ

Working families’ incomes have grown in recent decades. But the gains came mostly because they worked longer hours than because of wage increases, according to new research by the Brookings Institution‘s Hamilton Project. […] Among two-parent families, median earnings did rise by an inflation-adjusted 23% from 1975 to 2009. But the parents’ combined hours worked increased by 26% during the same period–accounting for most of the income gains.

The median income for two-parent families rose to $70,000 in 2009, for working 3,500 hours a year on average, compared with working about 2,800 hours in 1975 to earn $56,600 (in 2009 dollars). Hmm.

Law School Economics: Ka-Ching! and Reactions – NYT
Law schools have the power to raise prices and increase enrollments without any decrease in demand… even as the job market worsens for lawyers. Result: Law school tuition rises 4x faster than even overall college tuition costs, which are already skyrocketing. Are law schools abusing this pricing power?

Health Insurance Now Required To Provide Free Vaccinations

There are many changes to health care that have come and are coming from the Affordable Care Act. For example, if you are a young adult looking for health insurance, you can now be covered under your parent’s plan (if it covers children) until you turn 26 years old. (See here for more info.)

Another change that I was reminded about from this CNN Money article is that plans must cover “recommended preventive services” without charging a deductible, copayment, or coinsurance. In other words, it’s free as long as you visit an in-network provider. Something to consider if you’ve been putting them off due to cost.

The list of included preventive services is long and covers a variety of screenings, and also includes the cost of 10 vaccines recommended by the Centers for Disease Control and Prevention. Here is the list from CDC.gov. For adults, the CNN article highlighted the Influenza, Pneumococcal, Tetanus/Diphtheria/Pertussis, and Zoster (shingles) vaccines, but I see other familiar ones like Hepatitis A, so talk to your doctor. The required frequency varies from annually for the flu to once total for the shingles vaccine. A family member got shingles recently and it was not a pleasant experience.

There are some exemptions for existing plans, but as time progresses almost all plans should participate. From Healthcare.gov:

Unless noted otherwise below, the recommended services must be provided without cost-sharing when delivered by an in-network provider in the plan years (in the individual market, policy years) that begin on or after September 23, 2010. For recommendations that have been in effect for less than one year, plans and issuers will have one year from the effective date to comply.

Investment Portfolio Update: Asset Allocation & Fund Holdings – July 2011

This an update for my investment portfolio, including 401(k) plans, IRAs, and taxable brokerage holdings. There have been only a few small changes since my last portfolio update. As always, this is our own personal portfolio and may not necessarily be completely applicable to anyone else.

Asset Allocation – Target vs. Actual

I separate the stock and bond portions for clarity. My target asset allocation remains the same:

Here is my actual stock allocation, where it shows that I am slightly overweight US Total and will need do some light rebalancing.

My actual bonds allocation is not really worth making a chart for… the target is 50%/50% and I have 47% short-term nominal bonds and 53% inflation-protected bonds.

Stocks vs. Bonds Ratio

[Read more…]

Free Popcorn with Facebook Like & Smartphone

More social media bribery! Yahoo Movies will give you a coupon for a free small popcorn if you “Like” them on Facebook. The coupon will be sent via text message. Good at Regal Cinemas, United Artists Theatres or Edwards Theatres locations. From the FAQ:

*Must be a browser enabled phone to get a coupon. Coupon will be sent as a link in an SMS message. Standard carrier message and data rates may apply. Coupon valid for 7 days from when sent.

Virgin Mobile $25 a Month Plan w/ Data : Price Increase on July 20th

Virgin Mobile has a set of no-contract Beyond Talk plans that include minutes and unlimited data. Their lowest plan currently offers 300 minutes and unlimited data for only $25 a month. Previous post with more details here, but now you can buy an LG Optimus V with Android OS for $150.

However, starting July 20th, the price will increase to $35 a month for new customers. However, if you are an existing customer or activate by July 19th, you will be grandfathered in on the $25/mo plan. Edit: The 1200 Beyond Talk plans will increase $5 a month, while the unlimited will actually decrease $5 a month. So if you’ve been meaning to switch, you can save $60 to $120 a year by doing so before 7/19. I’m not sure how long shipping takes, so you might need to act quickly and find a phone in a store like Target or Walmart.

$25 including taxes is a great deal for light talkers who still want a full-featured Android phone with apps and all that. My mother uses Virgin Mobile prepaid and the coverage seems to be adequate in most areas. Virgin Mobile uses the Sprint network, but you aren’t allowed to roam on other networks like you are if you actually are a Sprint-branded customer. Any readers use this plan?

Netflix User Poll: How to Handle The New Pricing Changes?

Netflix users around the country are abuzz about Netflix’s new pricing plans. Previously, all DVD plans included unlimited internet streaming. Late last year the prices were upped slightly to $10 a month for 1 DVD out at a time, $15 for 2 DVDs, and $20 for 3 DVDs. (I’m rounding because I think .99 pricing is annoying.) Coming September 1st, 2011, Netflix has separated the DVD and Streaming options completely. Streaming is $8 a month, and there is no discount if you add it to a DVD plan. 1 DVD at a time is $8, making the total now $16 month – a 60% price hike. 2 DVDs at a time is $12, making the new total $20 a month, a 33% price hike.

Now, that’s one way to look at it. However, I really only used Netflix streaming very lightly. Instead, I can now get my 1 DVD a month for only $8. Or, I can upgrade to 2 DVDs for month for $12. I think that streaming video is the key to Netflix avoiding becoming the next buggy-whip manufacturer, and that making things a la carte was something that had to be done sooner or later. I just think the move came too early. Their streaming quality and selection is simply not good enough for me to pay $8 a month for it.

According to a reader poll last month, 63% of you subscribe to Netflix. So think about it for a minute… what are you going to do?

Netflix Subscribers: How Will You Respond To The New Pricing Plan Changes?

View Results

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Some people say that they are going to switch to Redbox or Blockbuster Express, but I’m actually probably going to go with the 2 DVDs for $12 plan, since I don’t like having to remember to return movies at the grocery store. If anything, this will push me to explore other online streaming options for the occasional “I’m bored and there’s nothing to watch” moments. I know that with a paid Amazon Prime membership ($79 annually) you can get free access to Amazon Instant Video as well as that handy 2-day shipping. Not sure how good their selection is, though. Alternatively, I could rent movies a month from iTunes at $1-$4 each, and they’d be new releases.