Archives for March 2012

MarketRiders Portfolio Manager Review: First Look, Asset Allocation

Time to try out another online portfolio manager – While previously-reviewed Betterment is an website/broker/advisor combo that handles all the decisions and trade executions for you, MarketRiders is more like an online portfolio coach telling you what trades to place yourself at the discount broker of your choice. Both services offer diversified portfolios using low-cost index ETFs, but think of it as one cooks you a nice tray of lasagna while the other one provides you a detailed, step-by-step recipe.

Free Trial Sign-up
To find out what the recipe is, you have to sign up for a free 30-day trial with your credit card information. The regular price for the service is $149.95 a year or $14.95 per month. You will be auto-enrolled after 30 days, but MarketRiders promises that canceling is easy and can be done completely online within two clicks. I can confirm it is indeed that easy. Just go to My account > Manage my subscription > Cancel my subscription. You still even get to use the rest of your free 30 days after canceling. Now, what do you get?
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Poll: Do You Use AutoPay To Pay Bills Automatically?

One common recommendation for new parents is to save time wherever you can. So tonight, for the very first time, I have signed up for the AutoPay feature for my most heavily-used American Express card to have it pay the credit card bill in full each month by withdrawing money from my bank account automatically. I don’t have to do anything.

Usually, I don’t like giving any vendors the right to suck money (“pull”) from my checking account. It feel invasive, somehow. I prefer to use my bank’s online BillPay feature to send (“push”) money after I get my paper bill and verify all the charges are legit. I also like to see my electric bill to monitor our power usage, and the water bill to make sure there aren’t any leaks, etc.

However, with a newborn I can potentially imagine forgetting to pay a bill, so maybe automation is a good idea. I have never had any problem disputing a wrong charge with AmEx, and I have an checking to savings overdraft buffer at Ally Bank so I won’t be dinged with overdraft fees. If it works out, after looking around it appears that almost every bill that I have can be set to AutoPay. What you do think?

Do you use the AutoPay feature to pay any bills?

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First Baby! Things To Buy, Things Not To Buy? (Ask The Readers)

After a long period of trying and a month before our planned IVF procedure, we recently found out Mrs. MMB was pregnant! We were being carefully optimistic so we kept things rather quiet until now. We just had another ultrasound at 20 weeks that indicated we were going to have a little girl. We are beyond excited.

Of course, this discovery has also opened the floodgates to baby shopping and Mrs. MMB is itching to start nesting. As this is our first child, we started reading a lot of books but are still rather lost.

For the parents out there… In financial terms, how was having a baby different than you expected? Did it cost more money than you thought? Less money (ha)? What items were really important to buy properly? What things did you buy that weren’t very useful? General advice, specific recommendations, whatever. I know you readers are quite smart, so I’ll take whatever advice you have to give. 🙂

I know that there are many other blogger with newborns, so I should look for some applicable posts as well. I noticed that we are about a month behind J. Money of BudgetsAreSexy. I already have a good amount of material simply about the costs of infertility itself. The level of assistance possible today is incredible, but it takes time, energy, and a lot of money.

Understanding the Habit Loop: Cue, Routine, Reward

Personal finance in theory is simple. Earn more, spend less. We all know that. But what makes it hard is changing our behavior, and much of that behavior is controlled by habits that we can’t stop. A new book called The Power of Habit: Why We Do What We Do in Life and Business by Charles Duhigg tries to explain the science and behavioral psychology of how habits work. You may have already seen some articles based on his work:

  • How Companies Learn Your Secrets (NY Times) – Includes how Target figured out that a man’s teenage daughter was pregnant before he did.
  • The Power of Habit (Slate) – An excerpt of the book explores the science of cravings and a habit that almost all of us have: brushing our teeth with toothpaste each morning.
  • Book Review in Businessweek – About how a new CEO for Alcoa changed the company by changing their routines.

So how do we change our bad habits so that we are more productive, healthier, and wealthier? We have to understand the Habit Loop, which consists of a cue, the routine itself, and a reward. In the case of toothpaste, the cue is feeling a film over your teeth (or just waking up). The routine is brushing your teeth with toothpaste. The reward is the feeling of a clean mouth, but critically also the tingling feeling from the toothpaste. Even though it doesn’t actually help clean your teeth, without the ingredients that cause the tingling, people don’t feel like toothpaste does it’s job and won’t buy it. We crave the tingling.

Stopping a habit means stopping the habit loop. For example, Duhigg was gaining weight because every afternoon he would go down to the cafeteria and eat a cookie and socialize with friends. After some experimentation, he figured out that the socializing was the reward, and the cookie-eating had just been subconsciously linked. So he started a new habit where he would socialize away from cookies and the craving of snacks went away.

For other bad habits, you may need to avoid the cue, or replace the reward with something that doesn’t harm you as much. I believe this is how nicotine gum and electronic cigarettes work. You can get the nicotine buzz and/or the physical routine of holding a stick and sucking flavored “smoke” out of it.

Starting a new desired habit involves creating a positive reinforcing loop. An example given is to create a cue, like leaving your sneakers and workout clothes beside the bed before going to sleep. The routine is working out, but you need to actively anticipate the reward – a fresh fruit smoothie or maybe the feeling of looking at the scale each day and seeing your weight go down. Replacing bad habits not only requires learning replacement routine or rewards, but also practicing them over and over again.

Is it really that simple? I doubt it. Is this yet another book that distills a complex subject into a overly-simplified but convenient story? Maybe, but I like the questions that it asks. Now which of my many bad habits should I try to change…

Vanguard Lowers My Portfolio’s Fund Fees… Again!

There will always be debate regarding investing in actively-managed stock pickers vs. passive index followers. But even for active managers, costs matter more than star ratings and past performance. The lower the expenses, the less headwind year in and year out.

The best thing about using Vanguard funds is that they have consistently lowered my investment fees over time as their own costs have dropped. When that happens, it’s like getting guaranteed higher returns that continue to compound each year.

Last year, they lowered the fees on several funds and also added Admiral shares. Last month, they dropped some fees on their Emerging Markets fund. Most recently, they announced another round of expense ratio cuts. Check the article for all the funds, but here are the ones that I hold:

Funds In My Personal Portfolio Old expense ratio New expense ratio
Vanguard Emerging Markets Stock Index Fund (Investor shares) 0.35% 0.33%
Vanguard Emerging Markets Stock Index Fund (ETF/Admiral) 0.22% 0.20%
FTSE All-World ex-US Index (ETF) 0.22% 0.18%
Total International Stock Index (Investor shares) 0.26% 0.22%
Total International Stock Index (ETF/Admiral) 0.20% 0.18%

The total weighted expense ratio of my investments is probably under 0.20% annually now. The only way to go lower is to hold the stocks or bonds directly in a brokerage account, and even then I have consider commission charges.

AmazonLocal: $10 Amazon GC for $5

If it wasn’t for the ads on my Kindle (no good offers recently… boo), I wouldn’t even know that Amazon had their own Groupon-clone called AmazonLocal. I don’t even bother subscribing to any new copycat sites other than Groupon and Livingsocial, otherwise I get coupon overload.

Well, they are going to try and change that by selling a $10 Amazon gift certificate for $5 today, Tuesday 3/20. Limited quantities. I expect over a million to be sold, or else this promo will sell out in a flash with many disappointed people. Check out this page for details.

What Do People Regret The Most On Their Deathbeds?

Bronnie Ware was a nurse who spent several years working in palliative care, caring for patients in the last weeks of their lives, and recorded her experiences in a blog. She wrote an excellent post about the most common regrets of the dying, which became so popular she expanded it into an entire book The Top Five Regrets of the Dying: A Life Transformed by the Dearly Departing about how we can live better lives by addressing these common regrets. (The blog post has been reprinted in various places, I found it in an AARP magazine.)

1. I wish I’d had the courage to live a life true to myself, not the life others expected of me. I used to think of this as people not doing all the things on their “bucket list”. But it is more nuanced than that. Most people aren’t even acting to pursue their dreams and live harmoniously with their personal values, let alone worry about not achieving them. Instead, we are worried about not being rich enough or having the neatest stuff or posting trendy things on Facebook.

2. I wish I didn’t work so hard. Ware says it best herself:

All of the men I nursed deeply regretted spending so much of their lives on the treadmill of a work existence. By simplifying your lifestyle and making conscious choices along the way, it is possible to not need the income that you think you do. And by creating more space in your life, you become happier and more open to new opportunities, ones more suited to your new lifestyle.

3. I wish I’d had the courage to express my feelings. My interpretation of this one is that you should not be afraid to cut out the negative influences on your life, and also be sure to nurture the positive influences. Life’s too short to deal with people that bring you down. Meanwhile, we should let the awesome people know how much we appreciate them.

4. I wish I had stayed in touch with my friends. If I died today, this would be a major regret. Every time I move, I leave behind great friends that I lose touch with.

5. I wish that I had let myself be happier. Happiness is a choice. I remember reading this concept in the bestseller Seven Habits of Highly Effective People by Stephen Covey. I prefer the phrase that life is a choice. Conscious living is pretty much the common base of any life improvement exercise, which includes all personal finance blogs.

Kiva Microfinance Loan Update & Default Rates

I have been lending some money to people through Kiva microfinance to help alleviate poverty since 2007. While reinvesting some funds that were paid back, I noticed that I just reached $1,000 in money lent out through 40 loans of $25 each. Kiva loans do not pay any interest. Out of the $1,000 that I have lent out, I have received about $805 back, about $185 is outstanding, and I have lost about $10. Now, you should know that the people borrowing this money are paying interest rates much higher than zero but much of that interest goes back to paying operational costs and covering defaults. There has been some debate as to whether this is becoming a form of predatory lending, but I believe there is a real need for such lending in these countries. You also have to trust Kiva in their selection of MFI field partners. I also do microfinance lending at Microplace.

Right now you can get a free $25 trial to try out Kiva using my invite link (I get nothing). You basically get to make a free $25 to a person of your choosing from a developing country, but when it is paid back you the money goes back to the sponsor. I know, rather cheesy. I think you should just have to keep lending it out by making it ineligible for withdrawal. That’s what I like about this type of lending – the money you commit can help many people over time.

The Ethics of Credit Card Rewards and Bonuses

The NY Times has a regular column called “The Ethicist”, and it recently talked about credit card rewards. A reader writes in and asks:

When shopping at big retailers, take up the offer for a new credit card to take advantage of the, say, 10 percent discount. Then when the bill comes, pay it and cancel the account (and risk a slight but temporary dent in your credit rating). I think this isn’t ethical.

The Ethicist disagreed:

That 10 percent discount is a sale by another name. It’s designed to get you in the door and shopping. As long as you buy something, you’re helping to make the store’s promotion a success. These credit-card offers never ask you to promise that you’ll keep the account open. They just ask you to sign up. After that, it’s up to the store to make you feel as if additional purchases are in your interest.

Whenever you are dealing with a big business, I always prefer to look at these things from a practical point of view. Retailers and financial companies are not offering these promos out of the kindness of their hearts. Their promotions are carefully planned to make them money overall, often in ways most people don’t even know about. Does a sale on milk mean that you have to buy all your other groceries at the store? No, but since you’re there you probably will buy something else. Are you obligated to? I don’t see how.

The real reason why credit cards have to offer things like $500 to sign-up for a new credit card is that people are really lazy. Most people have the same bank account they opened when they were 18 years old, and the same auto insurance company as their parents because by default that was their first insurance company. Most people that qualify for promotions have good to excellent credit scores and don’t even carry balances. It’s just that change is hard, and new customer acquisition costs are notoriously high in the financial industry.

You’ll notice that many sign-up bonuses now require a minimum spending requirement. Again, this is to make you put the card in your wallet or purse and use it several times, hopefully building up that habit. Also notice how credit card rewards focus on “everyday” categories like groceries. Another small psychological nudge.

I always look at new credit cards as trials. I will try them out, and see how I like it. I give them a chance – that’s all that I owe them. If I do, then I keep it. I’ve paid annual fees on the Starwood American Express card for years because I ended up discovering the benefits are worth it to me. If I don’t like it, then I cancel. That seems like the ethical thing to do.

TIPS and Historical Breakeven Inflation Rates

The Calafia Beach Pundit has an interesting discussion on TIPS (inflation-linked bonds). What caught my eye was a nice chart of historical TIPS real (after-inflation) yields vs. Treasury nominal yields. The difference is what inflation would have to be for them to pay out the same total yield, called the “breakeven inflation rate”. If actual inflation is lower, then Treasury bonds end up paying more. If actual inflation is higher, then TIPS pay more. (I’m not really sure why the breakeven inflation rate is on a different scale.)

It’s interesting how relatively steady the breakeven inflation rate has been. The low breakeven inflation rate back in 2009 was a good time to stock up on TIPS. Today, the expected inflation is about the same as historical average but real yields are at historical lows. He concludes:

To sum up: TIPS are only attractive to an investor who believes 1) that inflation will prove to be higher than expected, and 2) that economic growth will continue to be disappointing.

I’m still holding a position in TIPS in my portfolio asset allocation. I have historically overweighted them with high real rates, and today I am slightly underweighting them due to low real rates. They’ve done their job though, helping keep me off the Pepto Bismol during these last few years.

More Statistics On 401(k) Target Date Retirement Funds

Just as theorized by a previously-mentioned academic paper about target funds, a new Bloomberg article talks about how some mutual fund providers like PIMCO and Invesco are now adding things like commodities futures, options, and currency swaps into these all-in-one funds. Will all these bells and whistles be worth the added cost? I doubt it, but differentiation is important in marketing. The article also included some interesting stats about these funds:

Investments in the [target date retirement] funds have swelled more than 380 percent since 2005 to about $343 billion as of September, according to the Investment Company Institute, a Washington- based trade group for the mutual-fund industry. […]

The majority, or 53 percent, of plan sponsors that automatically enroll participants in 401(k)s use target-date funds as the default investment, according to a 2011 report by the Plan Sponsor Council of America, a Chicago-based trade group.

There are more than 40 target-date mutual fund families employers may choose from and some sellers also offer them in collective trusts or customized versions, said Jeremy Stempien, director of investments for the retirement solutions group at Morningstar Investment Management. “We can see tremendous discrepancy, tremendous differences among asset managers,” said Harvard’s Pozen, who’s also a senior fellow at the Brookings Institution. “I don’t think most people understand what they’re getting.”

Fidelity, Vanguard and T. Rowe Price Group Inc. controlled about 75 percent of the target-date assets in 2011, according to Morningstar. The average fee for a target-date mutual fund last year was about 1.1 percent, according to Morningstar, which included all share classes and retirement years such as the 2030 or 2040 funds.

Fees for the funds at Pimco and Invesco averaged about 1.2 percent. Vanguard, which mainly uses three broad-market index funds in its series, had the lowest expenses at about 19 basis points, or 84 percent less than the more expensive funds. A basis point is 0.01 percentage point.

Vanguard reported yesterday that in 2011 about 64 percent of new enrollees in 401(k) plans administered by the company invested solely in a target-date fund. The Valley Forge, Pennsylvania-based firm managed about $100 billion in the funds as of Feb. 29, according to spokeswoman Linda Wolohan.

I don’t invest in any of these funds, but I keep track of them because they are where the industry is heading. I have recommended Vanguard Target Retirement 20XX funds to family members, but have adjusted the “date” to match their own situations.

Quicken Mac 2007 OS X Lion Compatible Version Released

I know that there was some noise when the Mac OS X 10.7 Lion was released and Quicken 2007 for Mac was reported by Intuit to be incompatible with any computer running the new operation system. Next, they release Quicken Essentials for Mac which was a neutered version of Quicken which quickly angered long-time customers even more. So they promised they would rewrite it to work on OS X Lion. Well, it has finally arrived. Cost is $15. Thanks to reader Paul for the tip.

Data migration. According to their FAQ, users can import data from Quicken 2005, 2006 or 2007 for Mac, as well as from Quicken Essentials for Mac. File conversion is not possible for Quicken 2004 for Mac and prior versions.

So now you can pay more to use their 5-year old software, hurray! I still think it’s pretty clear that Intuit isn’t going to spend too much more effort improving Quicken, instead they are spending more money on which is online and free to users (ad-supported). Has anyone tried it out yet?