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

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.

Posted in Investing, Retirement, Savings Bonds | 24 Comments »

Citi Dividend Platinum Select Visa Card – 5% Cash Back on Rotating Categories

The battle to be the credit card inside your wallet or purse heats up again! Citibank has a new offer for the Citi Dividend Platinum Select Visa Card with an a sign-up bonus of $100 cash after making $500 in purchases within the first 3 months of the account opening. In addition, there is a good rewards program to keep you interested, offering 5% back on different rotating categories every 3 months.

From 1/1/12 to 3/31/12, you’ll get 5% cash back on Fitness clubs, health care and utilities. On all other purchases, you get 1% cash back with no tiers. After you get your card, you must enroll by logging into your account online or calling 1-800-231-0891. There is no cap on the 5% back, except for the $300 overall cap on all dividend rewards earned annually (sign-up bonus doesn’t count). This card has no annual fee, so I can still keep it around specifically as a 5% cash back card.

Chase has their similar Chase Freedom Visa – $200 Bonus Cash Back, which is recently increased their promo offer to a $200 cash bonus (coincidence?) and offers 5% cashback on up to $1,500 spent at Gas Stations and Amazon.com from 1/1/12 – 3/31/12. Must spend $500 in 3 months. No annual fee. While there is often overlap, having cards from different issuers allows higher spending limits and different categories at times.

Compare with other $500+ credit card bonuses available, but remember that this card has an ongoing benefit as well as no annual fee.

Posted in Credit Cards, Deals & Offers | 10 Comments »

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

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. This week, daily deal site KGBDeals has a 2-for-1 offer on ThredUP. You get two boxes of kid’s clothing including shipping for $15.95, instead of just one. 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?

Posted in Family, Frugal Living | 10 Comments »

150 Delta Skymiles For Watching 1-Minute Video

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.”

Posted in Deals & Offers | 7 Comments »

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

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.

Posted in Investing | 8 Comments »

Museum Day 2011: Free Admission On Saturday 9/24

In the spirit of Smithsonian Museums, who offer free admission everyday, Museum Day is an annual event hosted by Smithsonian magazine in which participating museums across the country open their doors to anyone presenting a Museum Day Ticket…for free. One ticket per household, for two people. Find a participating museum here.

Posted in Deals & Offers | 1 Comment »

Half-Off Movie Night: 2-For-1 Tickets with Visa Signature, 50% off AMC Popcorn Combo

Looking to upgrade from a Netflix + Act II Popcorn night? Every Friday night, you can get 2-for-1 movie tickets from Fandango.com if you have a Visa Signature card. (20% off $25 on other days. Check out your cards, you may be surprised to have one and not know it.) If you are a member of AMC Stubs, you can get the service fee waived as well. Also, you can get 50% off a Large Popcorn/Large Drink combo from AMC with this printable coupon. Valid from 8/26-9/8.

The summer blockbuster season is almost over, and the only one I saw was Harry Potter. Am I the only one that was underwhelmed? I think the only other one I wanted to see was Hangover 2, but I can wait for DVD.

Posted in Frugal Living | 4 Comments »

E-Trade Baby Doesn’t Like Market Volatility Either

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.

Posted in Funny, Investing | No Comments »

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

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.

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.

Posted in Frugal Living | 8 Comments »

Lower Costs = Higher Returns (Again) and Survivorship Bias

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 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.

Posted in Investing | 4 Comments »

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

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.

Posted in Behavioral Economics, Frugal Living | 16 Comments »

New Business Gold Rewards Card from American Express OPEN

(Update: The 50,000 points offer is no longer available. Please check out these current $500+ credit card bonuses that are still available!)

The New Business Gold Rewards Card from OPEN, which is one of their upscale-oriented charge cards for small businesses where you must pay off the balance each month but you get the famous AMEX perks like purchase price protection, extended product return protection, and AMEX extended warranty. Here are the highlights:

• The annual fee is $0 for the first year of card membership, and $175 thereafter. This way you can try out the card for a year for free. Get unlimited Additional Gold Cards for an additional annual fee of $50 but this fee is also waived for the first year.
• Triple points on airfare. What makes this card “new” is that you can now earn triple points on airfare as well as double points on advertising, shipping, and gas purchases on the first $100,000 of eligible purchases in each category each calendar year. Everything else earns 1 point per dollar spent.

Business Credit Card Eligibility

Many people aren’t aware of the fact that they can apply for business credit cards, even if they are not a corporation or LLC. Why? Because any individual can be a business as well. The business type is called a sole proprietorship. Perhaps you sell items on eBay, Craiglist, or Etsy. Maybe you do some freelancing and/or consulting. If you earned more than $600 from a single client, you probably got a 1099-MISC tax form and filled out a Schedule C. Boom! You’re a sole proprietorship. This is the simplest business entity, but it is fully legit and recognized by the IRS. On a business credit card application, you should use your own legal name as the business name, and your Social Security Number as the Tax ID.

Specifically, this card will require you to personally guarantee that you’ll pay them back what you charge on the card, which means they’ll check your personal credit score like any other consumer card. However, the card itself is a business card so it won’t show up on your personal credit report, so it won’t change things like your credit limits, average account age, or credit utilization ratio.

Meeting Minimum Spend Requirements

I acknowledge that the spending requirement amounts to $2,000 per month, which can be tough. Here are some tips readers have suggested. You can try to buy AMEX gift cards to help spread out the purchases over time, buy gas or grocery or Costco gift cards, prepay utility bills or insurance premiums, use the personal version of Amazon Webpay to send money to your spouse, and I’ve even bought some Forever postage stamps to put me over the top.

Another offer out there is the American Express Platinum Card affiliated with Mercedes-Benz, which offers 50,000 MR points with $1,000 minimum spending but in conjunction with a hefty $475 annual fee which basically cancels each other out. However, you do get airline lounge access for a year and $200 in airline credit towards baggage fees and such.

As usual, compare this card with other current $500+ credit card bonuses that you can also apply for.

Posted in Credit Cards, Deals & Offers | 6 Comments »