Archives for August 2011

U.S. Savings Bonds Have Outperformed Stocks Since 1998?

“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.”

A reader recently told me that he was no longer investing in the stock market after seeing the chart below from the Savings Bond Advisor. It shows the total portfolio value after investing equal monthly amounts in either the S&P 500 stock market index or Series I US Savings Bonds. The time period is from September 1998 (when “I Bonds” started being sold) through August 1, 2011. My comments follow.

The past returns of savings bonds are indeed pretty good, but not likely to be repeated. Series I Savings Bonds (I Bonds) were the new thing in 1998, and the government offered some really enticing interest rates on them. I Bonds have a fixed component that lasts for the duration of that specific bond and an variable component that adjusts with inflation every 6 months. From 1998 to May 2001, the fixed component was always between 3% to 3.60% above inflation (source). However, since May 2008, the fixed rate has been between 0% and 0.7%. For the past year, the fixed rate has been a big fat zero. I would love to have a savings bond paying 3% plus inflation (currently 2.30%), as some current bondholders have, but I don’t expect that to ever happen again.

Now, that doesn’t mean that they aren’t still a competitive investment, especially for the short term. Since interest rates are so low, I still buy savings bonds even at a 0% fixed rate as part of my emergency fund cash reserves.

Savings Bonds are being slowly killed by the government. Even though savings bonds have historically encouraged people of all income levels to save, it appears that the US Treasury is slowly killing the savings bond. As recently as 2008, you could buy $30,000 worth of each type of savings bonds a year, per person. For a while, we were able to even use credit cards to buy them without a fee. Today, you can only buy $5,000 of paper I-bonds and $5,000 of electronic I-bonds a year, and even paper savings bonds are being phased out in 2012. (You can still overpay your taxes and buy paper bonds with a tax refund in 2012.) There was even a NY Times article last week entitled Save the Savings Bond. Basically, even if you wanted to create your retirement portfolio with savings bonds, you can’t.

Investing solely in inflation-linked bonds is actually recommended by some financial authors. The thing is, the government has so much debt that it greatly prefers US Treasury bonds which can be sold by the billions. Printing a $50 savings bonds is not even a drop in the bucket, it’s closer to a H2O molecule in the bucket. What you can invest in is Treasury Inflation Protected Securities (TIPS), which like I Bonds are backed by the government and pay an interest rate linked to inflation. Economics professor Kolitkoff in the book Spend ‘Til The End recommends your entire portfolio to be TIPS. The problem? You’re gonna have to save a lot. TIPS yields are very low, currently offering yields of negative 0.7% above inflation (!) for a 5-year bond to a meager 1.1% above inflation for a 30-year bond. If you’re okay with saving 50% of your income every year for 30 years, then this plan might work for you.

There is no easy answer as to the best place to invest right now. I am sticking with a diversified low-cost portfolio with both stocks and bonds (including a nice chunk of TIPS inside, which has done quite well recently), and you can see with this chart that it has also done pretty well the last decade.

ThredUP.com: Swap Outgrown Kid’s Clothing With Other Parents

“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.”

Update: ThredUP is no longer a clothes swapping site, but you can get a free $10 credit towards your first purchase of clothing at the new store.

Kids grow. Clothing doesn’t. That’s the basis for a new swapping site called ThredUP, which I’ve seen in multiple news articles recently. Another similar site is Zearly, but it seems like they are on hiatus.

Got clothes that doesn’t fit any more? Box up about 10 items (tops, bottoms, dresses) that fit the same age level and gender. They send you free boxes, you print a prepaid postage label online, and have it picked up from home or drop off at the post office.

Want some cheap clothes? Browse other people’s boxes and pick one. There appears to be feedback rating system for users. Each box costs $15.95 ($5 + $10.95 shipping). Some boxes have toys and books as well.

I don’t have kids, but I think I would definitely try this if I did, especially for babies and younger ones. At about $1.50 an item (regular price), it seems like a reasonable system. Any users out there?

150 Delta Skymiles For Watching 1-Minute Video

“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 can grab an easy 150 Delta Airlines Skymiles by visiting this website and watching a quick video about $300 Bose QuietComfort 15 noise-canceling headphones. Earn another 350 miles if you stop by a Bose store and do a live demo. Delta miles no longer expire, but hey it’s free. “Offers valid August 29, 2011, through September 12, 2011, while miles supplies last.”

Building An ETF Portfolio: Using Limit Orders vs. Market Orders

“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.”

In recent years, Exchange Traded Funds (ETFs) have been growing in popularity when building an investment portfolio. You can buy them from any discount broker, they have no minimum purchase amounts, and offer lower expense ratios than their mutual fund equivalents. Here are some sample ETF portfolios. On a case-by-case basis, I’ve been switching over some of my holdings from mutual funds to ETFs. But a practical question arises – Do you buy them with market orders or limit orders? This is in the context of buying and holding ETFs for a certain asset allocation, not for active traders.

Briefly, a market buy order is a request to buy an ETF at the best price available at that instant that someone else is selling it for. It will usually execute virtually instantaneously. On the other hand, a limit buy order is an order to buy a specific price or lower. If you can’t get that price, it will not execute. (There are more order types, but these are the only ones I use on a regular basis.) Limit orders are useful in IRA or 401k accounts when you have a set amount of money to work with.

Why I Always Use A Limit Order

Let’s say you want to buy an ETF like Vanguard Total US Market (Ticker VTI). If you pull up a quote, the big number they will show you is the last traded price along with a bid/ask. Let’s assume the last trade is $60 a share, and the bid/ask is $59.90 and $60.40. That means at that instant, someone says they will buy X shares at $59.90 (bid), and someone else will sell their shares at $60.40 (ask).

If you put in a market order and nothing changes in the meantime (computers are constantly trading every millisecond), then you’d end up buying shares at $60.40. However, there is a chance that those shares will be sold already, and nobody else is selling at that moment except for someone who wants $75. Not a high chance, but not zero. Then you’d be stuck buying at $75.

Alternatively, you can put your limit order for whatever price you like, and see if it hits. Now, what if you put a limit order above even the current ask? You’re basically saying, I want to make a purchase right now, and I’m willing to pay a certain amount more if absolutely required. Let’s say you use a limit order at $61, a small 1% premium to the last ask. My fear would be, would someone out there see that and sell me shares at $61, even if I could get them at $60.40 or even lower? According to this Schwab.com article, you won’t be taken advantage in such a way of because such action would be illegal:

Markets are not allowed to fill orders at a price worse than the market price, even if your limit order allows for it. Building in a little extra room to ensure your order is filled will not cause you to overpay—you should still be filled at the prevailing market price when your order comes to the front of the line.

This is called “best execution”. According to this SEC article, the quality of trade executions are constantly being monitored, even on a stock-by-stock basis.

In my own personal experience, I have entered many limit orders above the market price, and my fills are usually shy of my limit price and the same as market or lower. Even though I could have easily been ripped off, I wasn’t. As a result, I don’t bother with market orders. I just use a limit order, usually with a buffer, and I get protection from a price spike or “flash crash” situation and being stuck with a horrible fluke price, while at the same time my order is likely to be filled quickly at a price no worse than a market order.

How To Choose Your Your Limit Order Price
Okay, some how much buffer do you put in? It depends on what your personal requirements are. Maybe you only want to buy at a set price, so you don’t need a buffer at all. If you really want to make a purchase today and just want to enter one order and be confident you’ll get the shares, you could add anywhere from 0.5% to 5% on top of the current market price. If you really want to make sure you get the best possible price at the exact moment you’re staring at the ticker, you can simply enter a limit order somewhere between the bid/ask spread. However, you run the risk of the price inching higher and ending up having to pay more later. According to the Schwab article above, your chances change with the size of the spread:

The wider the spread, the greater your chance of order execution between the bid and ask. The reason a market maker may be more willing to lower the ask or raise the bid in order to trade with you is that he or she knows that investors are less willing to trade at the market price when the spread is wide. By contrast, when the spread is $0.05 or less, it will be more difficult to trade between the bid and ask. In such cases, you may want to consider a limit order at the bid or ask, since shaving a penny may not be worth the risk of the order not getting executed.

Finally, the time of day matters. The time periods right when the market opens and right before the market closes are known to have higher volatility. For buy-and-hold investors, you may wish to avoid this time if possible.

E-Trade Baby Doesn’t Like Market Volatility Either

“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.”

Has the stock market turbulence from the last few weeks got you pooping in your diaper? You’re not alone. Here’s a parody video of the usually confident E-Trade baby facing some portfolio losses. Warning: Some bleeped-out curse words.

CollegeHumor via Allan Roth.

80% off Restaurant.com: $25 Certificates for $2 Until 8/31

“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 haven’t mentioned these in a while. Restaurant.com is running one of their temporary 80% off sales on their $25 certificates (Regular price $10) with coupon code TASTY. Offer valid through 8/31 at 11:59PM PST.

Despite my initial skepticism about these things, many readers responded that they indeed found these certificates very useful for saving money. Always note the restrictions (dine-in only, not valid Friday night, etc.) which can vary for each place.

Here’s an example of how the savings math might work out. You find a restaurant on the list that you like that usually runs around $20 + tip per person (~$48 for a couple). You buy a $25 certificate for $1, which usually comes with a $35 minimum purchase + 18% required gratuity on full price.

Dinner for two = $40 regular menu price
Minus $25 certificate = $15
Plus cost of certificate ($2) = $17
Plus 18% gratuity on menu price = $7.20
Total price = $24.20 or 12 bucks a person, a 50%+ savings

If you haven’t searched them in a while, they’ve been adding more restaurants to the list. I use these when I travel as well, so if you know of a good restaurant value in a big city, please share the name and location in the comments.

Lower Costs = Higher Returns (Again) and Survivorship Bias

“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.”

Whether you invest your hard-earned money in passive index funds or actively-managed funds, the more important thing is that costs matter. Every penny you pay in mutual fund expense ratios, sales loads, trade commissions, and financial advisor fees reduces your return. Even Morningstar, a company famous for their proprietary 4-star star rating system, looked at their data and admitted that expense ratios are the “most dependable predictor of performance” and should be the “primary test in fund selection”. I like to visualize high expenses as a constant, relentless drag that is almost impossible to overcome over long periods of time. You can play with this cost widget to see how much costs eat into returns over time.

Here comes more proof. I invest a huge chunk of my money in Vanguard funds, because they offer the best selection of low-cost mutual funds around. Every year, as they get more successful, my costs actually go down as they advantage of economies of scale. However, they also offer a large selection of actively-managed funds, one of which has been around since 1928.

Data from Lipper Ratings shows that over 80% of Vanguard funds (both active and passive) have outperformed peer funds in the same categories over the last 5- and 10-year period ending 6/30/11.

You’ll find that T. Rowe Price also touts the returns of their group of funds:

Not by accident, one of their tenets of investing is low costs:

Low-Cost, Active Management
We believe in actively managing our funds and pursue a disciplined process to individually evaluate every stock and bond we invest in. But we don’t believe it should cost a lot. We keep our expenses low, so your investment can go even further. We offer over 90 funds with no loads, no sales charges, and expense ratios below their Lipper category averages.

Survivorship Bias
Making the case even stronger, by hovering over the the Vanguard chart, you can see how many peer funds there were. Let’s just take the stock funds. For the 1-year comparison, there were 10,644 funds in their peer category. For the last-3 years, that drops to 9,207 peer funds. Last 5 years, 7,562 peer funds. Over the last 10-years, only 4,035 peer funds existed.

Where did all the funds go? Sure, some funds are new, but there were lots of new funds back in 2000 as well. The fact is that many older funds are unable to be compared today because they never lasted 10 years. Most likely, their performance was so low that they quietly closed down or merged with another fund. This is called survivorship bias, and means that existing funds did even better than these charts might indicate because of the dead funds that aren’t even included.

Brand and Price As Shortcut Quality Indicators & The Coach Factory Outlet Trick

“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’m currently reading the book Cheap: The High Cost of Discount Culture by Ellen Ruppel Shell, which is very well researched and a good read so far. One of the major themes of the book is how our culture is losing the ability to discern quality for ourselves. As a result, we use brand names and prices as shortcut indicators of quality.

First, take brand names. In general, we love brand names, because each of them allows a mental shortcut as to what to expect. Mercedez Benz. Rolex. Nike. This is why outlet malls are so popular. Since brands = quality, and outlet = low prices, we get insanely excited. Outlet malls are greater tourist attraction draws than national monuments.

As for prices, how often do you see a huge number on a shirt price tag, but with a slash through it? Retail Price: $80. Your Price: Only $19.99. Even better, make it one-day only like Groupon or Woot.com. The Manufacturers Suggested Retail Price (MSRP) is often purely a marketing scheme to make you feel like you’re getting a deal. This is called the reference price. You may not know anything about fabrics or stitching, but hey, this shirt used to cost $80, so it must be pretty good quality. I’m saving over 75% off the original price, how can I lose?

Coach is given as a great example of a well-recognized brand name that uses these tendencies to its advantage. Starting out in 1941 as a small leather workshop in New York, Coach is a maker of “affordable luxury” leather purses and other accessories complete with trademarked logos. Most manufacturing is now done in China and other cheap-labor countries. In fact, the gross margins across the company are now a huge 70-75%. (Gross margin is the difference between selling price and the cost to produce.)

Traditionally, outlet and factory stores sold slightly damaged or defective examples of their regular products at a steep discount. However, it may surprise you that now many brands make goods designed specifically for their outlet stores. At a Coach Factory Store, 80% of the stuff inside is sold exclusively in those stores. These are lower-quality versions, intended to be sold only at outlets for a lower price. You can’t return outlet purchases at a regular store, because they aren’t the same thing and are subtly marked as such (also because they want to make it harder to return).

Would it surprise you further to know that Coach makes more profit from its factory stores than its full retail stores? Per this article, Coach had 347 retail stores and 129 factory stores in North America. In a way, you could say that the main purpose of the full-price Coach stores in upscale shopping centers is to keep up the facade of quality. Meanwhile, the Coach Factory Outlets provide all the profit. The glitzy stores create that critical reference price ($800 purse!), so you think the Factory Store price is a good one. A $149 Coach? What a deal. If you own Coach bags or know people who do, think about it. How many did you buy at a “real” store vs. a Factory store?

Over time, this practice should dilute Coach’s brand equity. However, if we are indeed unable to judge quality and are just interested in brand names anyway, then it will take a while.

Swensen Portfolio 10-Year Total Returns: Low-Cost Diversified ETF Portfolio Results

“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.”

Last week, I shared a chart that showed how a diversified portfolio that was rebalanced regularly still managed to nearly double in value over the last decade. Here’s another similar finding based on the David Swensen portfolio as compiled by an advisor group called ETF Portfolio Management.

Swensen manages the Yale University endowment and wrote an excellent investment book called Unconventional Success (my review) directed towards individual investors. Even though he does active management himself, he explains why low costs and low turnover are critical, how certain asset class are better than others, and why rebalancing regularly is important. He ends up providing a model portfolio made up of what he calls “Core” asset classes. Here’s the slightly updated David Swensen Portfolio with his recommended 70% stocks / 30% bonds breakdown. Actual low-cost index ETFs are included via ticker symbols.

30% Domestic US Equity (VTI)
15% Foreign Developed Equity (VEA)
10% Emerging Markets (VWO)
15% Real Estate (VNQ)
15% U.S. Treasury Bonds (IEF)
15% Inflation-Protected Securities (TIP)

Instead of the Total Bond Index from last week, which include everything from Treasuries to corporate bonds to mortgage-backed securities, the Swensen bond allocation only has nominal and inflation-linked Treasury bonds. The chart below shows the growth of $1,000 invested this way (eMAC) at the start of 2001 until the end of July 2011. (Last week’s chart included the start of 2000 to end of 2009.) The ETFs listed above were bought and rebalanced annually. eMAC stands for “efficent multi-asset class”.

Again, we see that the diversified and rebalanced portfolio has done well over the last 10 years, more than doubling in value. Check out their annual returns breakdown (summarized below), and you can see how in any single year different asset classes will have different returns. Some go up, some stay steady, some go down. This lack of strong correlation is what helps smooth out your portfolio, and makes you feel better that at least something is doing okay at any given time.

Now, this may not be the ideal portfolio going forward. Nobody knows the future, you can only do what you think gives you the best odds for success. But it does serve as another real-world example of how low-cost diversification works and that you should have good reasons for holding each of the asset classes that you buy.

(The “HF Index” indicated stands for the Dow Jones Credit Suisse Hedge Fund Index, which claims to track ~8,000 hedge funds and thus tracks overall hedge fund performance. After poking around their website, the returns seem to be net of manager fees.)

Get Out Of Sprint Cell Phone Contract, Avoid Early Termination Fee (August/September 2011)

“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 under a Sprint cell phone contract and want to get out of it without paying the steep Early Termination Fee (ETF), check your statements with a billing date in August. Look for the following text:

Administrative Charge Increase & Terms & Conditions Changes for Consumers
Effective 9/9/11, the Administrative Charge will increase to $1.50 per line for customers that receive the charge. For details, visit Sprint.com/taxesandfees. In addition, the Sprint consumer Terms (Ts&Cs) are changing. Please review them carefully at your local Sprint store or Sprint.com/termsandconditions.

You may be “stuck” in a contract, but a contract runs both ways. Sprint is also “stuck” and can’t go increasing your monthly bill whenever they want. The law states that if a company makes a material change to the contract, then the consumer has the ability to exit the contract without an ETF if they notify Sprint within 30 days of the notice. As stated on their own fees page: “The Administrative Charge is not a tax and is not an amount we are required to collect from you by law.” From the Sprint contract:

You may terminate each line of Service materially affected without incurring an Early Termination Fee only if you: (a) call us within 30 days after the effective date of the change; and (b) specifically advise us that you wish to cancel Services because of a material change to the Agreement that we have made. If you do not cancel Service within 30 days of the change, an Early Termination Fee will apply if you terminate Services before the end of any applicable Term Commitment.

I believe this admin charge used to be 99 cents per line. However they rephrase it, this is a price hike and thus a “material change”, pure and simple. If it wasn’t material, they wouldn’t be raising the prices on their 50 million customers x $0.50 extra = $25 million per month in additional revenue!

Many users on this Slickdeals post as well as some MyMoneyBlog readers have already reported success. You may need to ask for the Retentions Department or a supervisor, but don’t them talk you out of it. Sprint knows what they are doing, they just wanted to minimize the publicity, this already happened back in January 2010. One additional tip for some folks who want it is to ask for your line to be marked “out of contract”. This will allow you to simply exit your contract, but continue your service on a month-to-month basis. If not, you can ask to cancel at the end of the month to allow time to port your phone number to another carrier. Finally, they may offer you some sort of cash credit or other incentive to stay in contract.

Make Money Bidding on Self Storage Auctions?

“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.”

Self-storage unit auctions have been getting increased attention to two new reality TV shows, Storage Wars and Auction Hunters. The premise is simple. If someone pays to have their stuff stored there, but stops paying the rent, the storage company won’t let you pick up your stuff until you pay up. If you still don’t pay your bills, they’ll auction off all your stuff in order to make the unit available again. I’ve always tried to avoid such places because I figured that just meant I had too much stuff!

The auction itself is quite a gamble. Bidders usually only get to see what is visible while standing outside the unit, and that’s it. So you could end up with valuable antiques, or a carefully-folded collection of used underwear. Want to participate in a live auction to see what it’s all about? Traditionally, you would be looking for the legally-required notices in your local newspaper. These days, the best site I could find for looking up self storage listings in your area is Sparefoot.com, a start-up that primarily does self-storage price comparisons. Bring cash, and verify the time and place by phone on the day of the auction.

A few added warnings. First, the new popularity means winning bids have doubled in some areas. Second, some shady places now actually scam people by making the unit look artificially valuable with things like (empty) brand-name boxes. Almost sounds like a Freakonomics topic.

Wells Fargo, Chase Bank Testing Monthly Fees for Debit Card Usage

“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 fees are coming! Since February, Chase Bank has been testing out a monthly fee for anyone who uses their ATM debit card for purchases in areas of Northern Wisconsin. Regions Bank and Suntrust have added fees as well. Per this CNN Money article, Wells Fargo Bank just announced that it will start charging a $3 monthly fee for debit card usage next month in Georgia, New Mexico, Nevada and Oregon. (I guess they’re afraid of messing around in California just yet.) According to this WSJ article, Wells Fargo is only announcing this fee with one of those small inserts in your monthly statements, so heads up.

I know there has been drama over debit card interchange fees, but that was just a result of two big lobbying groups – small businesses vs. big banks. It was really not about consumer rights. The result was a new law that caps debit card interchange fees at 21 cents + 0.05% of the sale amount for banks with $10 billion or more in assets. Smaller banks with debit rewards like PerkStreet (review) say that this will not affect them.

I never use my debit card for purchases, so I would not be affected by any of this. Credit cards offer more consumer protection against fraud and things like extended warranties and free insurance, on top of the ability to delay payment for 15-30 days of float. More importantly, credit card rewards are better which means more money in my pocket. However, many people do like the simplicity of debit cards for purchases. If they don’t want to pay the fees, I hope they will vote with their money and move it immediately to bank that doesn’t charge such fees. Don’t expect banks to care about your angry internet comments; affect their bottom line and they’ll listen.